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BY JOHNSON AND HUNTLEY 

PUBLISHED BY JOHN WILEY & SONS, INC. 



PRINCIPLES OF OIL AND GAS PRODUCTION 

A general treatise with reference to American 
conditions. 

XV + 371 pages. 6 by 9. 148 figures and 1 
folding chart. Cloth. $4.50 net. 



THE BUSINESS 

OF 

OIL PRODUCTION 



BY 

ROSWELL h/jOHNSON 

Professor of Oil and Gas Production, University of Pittsburg 

L. G. HUNTLEY 

Lecturer on Foreign Oil and Gas Fields, University of Pittsburg 

AND 

R. E. SOMERS 

Professor of Oil and Gas Geology, University of Pittsburg 



NEW YORK 

JOHN WILEY & SONS, Inc. 

London: CHAPMAN & HALL, Limited 

1922 



Jlo ■ 



Copyright, 1922 

BY 

ROSWELL H. JOHNSON 
L. G. HUNTLEY and R. E SOMERS 



Stanbope ipresa 

TECHNIOVL COMPOSITION COMPANY 

F. H. GILSON COMPANY 

BOSTON, U. S. A. 



nci 16 V? 

^CU683738 



PREFACE 

Several volumes on various phases of the petroleum industry have 
recently appeared. These have treated at length of the geology and 
technology of oil and gas. Only one, however, '^ The Economics of 
Petroleum," by J. E. Pogue, has undertaken a consideration of the 
important economic element. In this admirable work the author is 
more concerned with oil as a commodity than with the management of 
its production. 

The present authors have recognized an immediate need on the 
part of many participating in the oil industry, especially the executives 
of oil companies, for a book on the business of oil and gas production. 
They have felt that the brief treatment of this subject in Johnson and 
Huntley's, " Principles of Oil and Gas Production " (1916) needs con- 
siderable expansion. A revision of the whole book, if the same scope 
were retained, would make a volume of unwieldy size, so great has been 
the advance in this field of knowledge in the few intervening years. 
Therefore, in view of increasing specialization, one or other of the authors 
will present such a revision from time to time, in separate volumes. 
The present book is the first of the series; the second will deal with 
valuation. 

The authors wish to acknowledge the cooperation of Professor 
Charles Reitell, Professor of Accounting, University of Pittsburg, in 
the chapters on The Annual Report, Cost Accounting and Depreciation 
and Depletion; of Mr. Paul Ruedemann of the staff of Johnson, Huntley 
and Somers in the chapters on Taxation and Methods for Predicting 
Future Prices of Petroleum, and of Mr. H. A. Fisher and Mr. R. B. 
Bossier, the latter on the staff of the same firm, for cooperation in the 
chapter on The Extraction of Gasoline from Natural Gas. 

RoswELL H. Johnson, 
L. G. Huntley, 

R. E. Somers. 
Pittsburg, Pa., 
Jammry 11, 1921. 



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TABLE OF CONTENTS 

I. The Choice of Regions 1 

II. Classes of Holdings 15 

III. The Lease, Form and Provisions 18 

IV. Technique of Leasing 29 

V. Oil and Gas Rights on Federal and State Lands 35 

VI. Oil and Gas Rights in Other Countries of North and South America . . 46 

VII. Trade in Leases and Royalties 57 

VIII. Modes of Indirect Development 60 

1/^ IX. Size and Scope of Oil Companies 63 

X. Financing of Oil Companies 71 

XL Organization and Development of the Personnel 75 

XII. The Oil Company Prospectus 87 

^^XIII. The Annual Report 92 

XIV. Costs 102 

XV. Cost Accounting 123 

XVI. Depreciation and Depletion . 132 

XVII. Taxation 142 

XVIII. DriUing Methods 153 

XIX. Extraction of Gasoline from Gas 170 

XX. The Mexican Situation . \ . . 177 

XXI. Methods for Predicting Future Prices of Petroleum 189 

XXII. The Outlook in the Oil Industry 198 

Appendix 202 

Oil Land Act of February 25, 1920 : 202 

Regulations for the Operation of the Act of February 25, 1920 212 

Digest of Decisions and Opinions on the Act of February 25, 1920 239 

State Acknowledgments 255 

South American Money Values 260 



THE BUSINESS 
OF OIL PRODUCTION 



CHAPTER I 
CHOICE OF REGIONS 

The business of obtaining oil-producing land varies in method with 
the type of company doing the work. Companies may be classified as 
follows: 

1. Old production companies seeking either to maintain production 

to offset the natural decline by the expenditure of depletion 
reserve, or else to increase their production by the expenditure 
of surplus earnings or new capital raised for the purpose. 

2. Refineries having the same objects in view. 

3. Newly formed companies desiring to build up an oil property. 

4. Old companies exploring mostly through subsidiaries, in foreign 

fields. 

5. Stock companies desiring production primarily as a basis for the 

sale of stock to the public. 

(1) Old Production Companies. — An old company, with its files and 
with the information in the minds of its officers, has a great advantage 
over newcomers. Such a company is able to sit back and select its 
prospects from a wider range, and so avoid dangerous ones that might 
otherwise be undertaken. An old company, because of its knowledge 
of value and conditions, can act more quickly in case of success in any 
area within its district, and can buy acreage close to the successful 
well to better advantage than a new company. 

Furthermore, in the case of an old company: 

(a) Its greater efficiency in late development, resulting from its 
organization and experience, gives a wider margin of profit. 

(5) It is better prepared to drill early and thus take advantage of 
the flush production of the pool. 

(c) Additional leases can be handled without proportionate increase 
of expense. 

1 



2 CHOICE OF REGIONS 

Experienced oil men hold conflicting views as to the relative value 
of the following methods for older companies : 

(a) Drilling wildcat wells in large blocks. 

(6) Checkerboarding cheap acreage which is thought to have a 

good chance of advance, from the probable success of tests 

in the general region. 

(c) Purchase of protection acreage near drilling wells. 

(d) Purchase of '' close-in " acreage for immediate drilling. 

(e) Purchase of partly developed acreage. 

(/) Purchase of fully developed producing lands. 

Opinion is also divided as to the proportion in which appropriations 
should be made, in case various methods are combined. 

Old conservative companies usually base their major operations 
upon (d) and (e). This is advisable because such companies are fre- 
quently closely related to pipe lines and refineries and must at all costs 
keep these running at full capacity. As they are often working at a 
profit, they more frequently have immediate cash accessible for such 
purposes. When well managed, they know the district intensively and 
so are better prepared to recognize good opportunities when presented, 
and to profit accordingly by money well spent. 

A certain proportion of the depletion reserve may also be appro- 
priated for drilling wildcat wells. The hazards are such that a com- 
pany should either appropriate enough to make sure that, in the long 
run, the failures will be amply compensated by the successes, or stay 
out of this activity. The chance of success, while uncertain, is mainly 
dependent on the skill, experience and organization of the geological 
department; and the percentage of profit is so great in case of success 
that much attention should be given to the personnel of this depart- 
ment, and especially to the comity between it and the production 
department. Failure in such comity may nullify the efficiency of the 
department. 

While the percentage of success in wildcat operations on,, geolog- 
ically attractive structures in certain parts of Oklahoma is high, in 
other districts and in such states as Louisiana, Texas and Montana, it 
is much lower. Other factors than evidence of surface structure must 
therefore be considered before embarking in wildcat operations, and it 
is in the estimation of these factors that the most important errors are 
made. 

In the period of activity through which Texas and Louisiana passed 



OLD PRODUCTION COMPANIES 3 

in 1918 to 1920, even though geology was used as fully as possible, 
the percentage of successes was relatively low, partly because there 
were fewer outcrops to work from, and partly because success on some 
slightly indicated structures led to the wide testing of such prospects. 
Wildcatting was (and still is) carried on in some cases by old companies 
as the best means of expending profits otherwise liable to the present 
high income-tax rates. 

In connection with more conservative operations, as in (d) and (e), 
the older companies also follow the second method of anticipating a 
boom in a certain district by buying scattered acreage at low prices, 
over wide areas. This was a noticeable feature in the development of 
Louisiana, following Homer. As geology is used more and more in the 
selection of leases, this checkerboarding method is hampered by the 
fact that geologically favorable acreage is taken up first, often by 
pioneers in the field, thus leaving only the less promising acreage at 
sufficiently low prices for the company desiring to checkerboard. Sev- 
eral large companies have been known to combine their efforts under 
one head and instruct the leaser to take alternate leases for each member 
of the group. The hope is that such companies will be represented by 
close-in acreage when any strike is made by wildcat operations. In 
this case, the company will usually supplement such holdings by addi- 
tional purchases after announcement of a successful strike. 

Taking " protection " acreage near wildcat wells drilled by other 
companies is also practical f or c6j;^in groups. The sale of such acreage 
is often undertaken by small operators, as a means of partly or wholly 
financing the drilling. Sometimes they make a profit on such a venture 
even though the results are only dry holes; a notable case was the 
Carlyle Pool in Illinois. By this means the financing is divided among 
so many purchasers of leases that the aggregate of wells of this type 
might be said to be financed by the industry as a whole. Certain large 
companies can be depended upon to take protection acreage in any 
well being drilled by responsible men on an approved structure, while 
other companies still pay little or no attention to geology, and select 
such purchases mainly on their general confidence in the company 
conducting the venture. 

The purchase of fully developed oil property does not offer sufficient 
speculative lure for the ordinary small company; but just because the 
number of purchasers is more restricted, it offers an attractive opportu- 
nity for large companies, provided sufficient attention is given to present 
and probable future fluctuations in the price of oil, to ensure buying in 



4 CHOICE OF REGIONS 

time of depressed price. The estimates given by various operators of 
the value, of an oil property vary very widely, unless the data are such 
as to permit the use of overworked and unreliable rules-of-thumb, in 
which case the variation will be less and the error still greater, because 
of unjustified confidence in such rules. The most widely used and 
most dangerous rule of this kind is to consider production of wells of 
nearly all sizes and over a very large area as being worth the same 
unit price per net barrel production. 

No company should make a regular practice of purchasing devel- 
oped properties without keeping one man well informed on modern 
appraisal methods, collecting data and calculating values, even if there 
is no property under option at the moment. In one general region the 
company should look to some one man as appraiser, whatever else 
may be his duties, and an analytical appraisal should be obtained from 
him before action is taken. This policy does not necessarily involve 
excessive detail if this man is given time to collect and have in mind 
much pertinent data ready for the day when action begins on a particu- 
lar case. 

A well-organized company with an aggressive policy will use a 
combination of all the methods mentioned above, distributing its 
efforts partly on the basis of the relative attractiveness of individual 
offerings which come to its attention, and partly upon its experience as 
to the relative success to be expected of each method in the territory 
in question. This requires a great deal of past experience and analytical 
capacity, as well as sound methods and a well-balanced judgment. 

In recent years, cooperation by various companies has been prac- 
ticed more than previously. This is desirable for small companies and 
for individuals, in that it lessens the burden of leasing expenses and 
divides the cost of drilling, which is becoming more expensive. Under 
the cooperative plan, the operations in one district will not exhaust the 
resources of any one company or individual. In case of success, there 
is often enough profit for each, and the uncertainty is shared. 

(2) Refineries Looking for Their Own Production. — The refinery 
with no connections with a producing company, and with insufficient 
production under contract, is in danger of eventually being caught by 
unfavorable market fluctuations as between crude and refined products, 
and thus being forced out of business. Many so-called refineries are 
in reafity only '' topping" or ''skimming " plants, producing only 
gasoline and fuel oil. They are active only temporarily at times of over- 
production, buying crude oil at abnormally low prices, selling the 



NEW COMPANIES BUILDING UP AN OIL PROPERTY 5 

fuel oil as a by-product and looking to the gasoline for profit. They 
are efficient only during the period of flush production in any pool, 
when the oil is difficult to market, and they are properly forced out of 
business when competition for crude becomes keener. 

The real refinery, on the other hand, represents a much larger in- 
vestment per barrel of crude capacity, and should at all times control 
enough crude production to guarantee at least running expenses, even 
though the remaining amount is purchased in the market, or con- 
tracted for at short terms. As a partial alternative, the large refinery 
may, at times of over-production, and cheap prices, purchase and tank 
sufficient quantities of crude oil to run the plant for some years, or at 
least to supplement later purchases and keep down the average price 
paid per barrel for all crude. Such a policy very richly rewards those 
who have the necessary cash reserve available at such a time. 

(3) New Companies Building Up an Oil Property. — New units of 
capital, desiring to lay a foundation for future operations in the oil 
business, must first satisfy themselves upon the following points : %^x 

(a) Whether or not an adequate amount of capital is available for 
preliminary operations, which must include, among other 
investigations, the making of geological and scouting reports' 
upon various districts to determine relative desirability. 

(6) What markets and pii^ie lines exist at present in the district, or 
may be expected in the future. 

(c) In what districts the highest ultimate returns, for the money 

spent, can be expected. 

(d) Whether, from their standpoint, immediate production on small 

acreage (involving smaller but more certain return on invest- 
ment) will be more advisable than 'the laying of a broader 
foundation in more widely scattered holdings. The latter 
plan will postpone returns, necessitate more extensive pre- 
liminary ground work, and involve more patience on the part 
of the investing group. If carried out scientifically, however, 
it will usually result in higher ultimate returns where the 
capital is ample. 

The best judgment on the part of experienced operators seems to 
indicate that the newcomer of more restricted resources should be 
prepared to follow the first plan, that is, to pay the necessary high 
prices and acquire small tracts of " close-in " acreage to producing 
acreage, and get at least some oil soon. This has the advantage that 



6 CHOICE OF REGIONS 

it puts the new operators into the oil business at once, gives them an 
education in drilHng and operating a property, and ties them down to 
one district. An intensive knowledge of one general area will result in 
the making of more money than a superficial knowledge of several 
areas, although some of these latter may really be better oil producers 
than the one settled upon. 

(4) Old Companies Exploring, Usually Through Subsidiaries in 
Foreign Fields. — American oil companies have become increasingly 
interested, during the past few years, in the exploration and develop- 
ment of properties in foreign countries. Their methods have been 
conspicuous for lack of coordination and for faulty personnel. Their 
aim has usually been one of the following : (a) Desire to acquire prop- 
erties to maintain the interest of their stockholders and directors, with- 
out further plans for the future except as opportunity or necessity 
presents itself; (6) Desire to have some attractive-appearing outlet 
for surplus earnings, by means of which high taxes may be avoided; 
(c) A well-laid plan to develop production to keep seaboard refineries 
running after the decline of domestic production, or (d) A basis of 
building seaboard refineries to supply foreign and maritime demand. 

Needless to say, foreign operations require more initial capital than 
operations in the United States, and usually involve other forms of 
construction than merely drilling producing properties. This additional 
construction includes such items as railroads, pipe lines, river and 
sea terminals and tank farms, camp sites and warehouses; capital is 
also required for legal and lobbying organizations and for building or 
chartering tank steamers. None of these expenditures is involved in 
the operation of a strictly producing oil company in the home field, 
where the oil is taken at the wells by the pipe-line companies. 

It may be said in general, therefore, that the smaller operator is 
eliminated in foreign operations, and the land controlled for develop- 
ment by a group entering a foreign field must be sufficiently large and 
promising to justify such major operations. The cooperation of small 
operators and wildcatters is lacking, and the whole burden and risk of 
prospecting, in addition to the construction work entailed after pro- 
duction has been obtained, usually falls upon the one company. 

For this reason, second- and third-rate chances and small acreage 
are not attractive in foreign fields, except as an adjunct to the future 
development of the better class of lands. As a consequence, the first 
large companies represented in countries such as those in South America 
have a decided advantage over later comers. 



OLD COMPANIES EXPLORING 7 

Yet in some cases the preliminary prospecting has been done by 
relatively weak groups, who, after bringing in a few preliminary wells, 
sell out to stronger companies who are better prepared financially to 
caiTy on the work. Such sales are by no means always at a profit. 

The fact that land is usually held in such countries in large blocks, 
and is acquired by denouncing government land, or by a direct con- 
cession from the government, furnishes additional factors which tend 
to exclude the small operators. 

While the familiar " lease grafter " is always present, he deals in 
large units and includes politics in his operations, and his market is 
therefore correspondingly restricted. 

In Mexico, the total effect is to discourage new capital from start- 
ing in the producing business, for the reason that production must be 
obtained before a pipe line can be justified. The time involved, first 
in drilling and then in building pipe lines and terminals, is so long, as 
compared with the total expectation of the life of certain pools, that 
these companies can only look forward to a few months' shipments 
before the pool is drained. The whole investment is then a loss, unless 
other production is secured, in which case it is necessary to lengthen 
the pipe fine and provide new pumping stations and tankage, before 
the company can begin to pay back the capital invested. In Mexico, 
this necessitates the amortization, in large part, of all pipe lines and 
pumping stations during the short life of each pool, as well as the pay- 
ing of all drilling and development and operating charges at the same 
time. It also involves a heavy land expense to keep up drilling reserve. 

This is because, in the Tampico fields, there is no such thing as as- 
sured production for the periods usual in the oil business. When a pool 
begins to show salt water near its crest, a few months will see its com- 
plete abandonment. On the other hand, a company owning its own 
transportation system and assured of a market for its oil, can afford to 
wait until a new pool is drilled in, and even then can afford to buy enough 
" close-in " acreage to keep its line full during the life of the pool. A 
company which develops production wdth no pipe-line connections may 
be able to sell its oil at the well, during the first part of the develop- 
ment of the pool, to some company which may not at first be represented 
by acreage in that pool. As the latter company acquires drilling sites 
and gets its production, the first operator is cut off. In the same way, 
during the last part of the pool's life, certain pipe-line companies may 
see their wells go to water before the entire pool has done so, and hence 
be compelled to buy from independant producers, for a short period. 



8 CHOICE OF REGIONS 



I 



But, for the larger part of the pool's producing period, the independ- 
ent operator, with a well on his hands and no pipe line, is at the mercy 
of the larger companies, and his best plan would be to sell out at the 
best price obtainable. 

(5) Stock Companies Desiring Production Primarily as a Basis for 
the Sale of Stock to the Public. — During certain periods of active 
stock-market speculation, there springs up a class of operators whose 
aim is to supply the demand for stock issues which combine the ele- 
ments of possible high yield with good news value, through associa- 
tion with some spectacular oil field then under development. 

For the purpose of these operators the connection of the stock offered 
with real production may be only slight, but it must be real. Therefore, 
it was a common practice in certain pools, especially during 1918-1919, 
for such a speculator to buy a small tract close to some large producing 
well, and drill on it. It made little difference to his plan that the price 
paid per acre was several times the value of any reasonable quantity of 
oil which could be expected to exist beneath such a tract, even though 
it might be in the richest part of the pool. The profit lay in selling 
stock to a certain element of the public. 

If a sufficient number of such speculators enter a field, such as the 
Burkburnett pool, they bid up the price for acreage to a point where 
the legitimate operator cannot compete. In addition, parts of the 
field are cut up into plots which amount to mere ^' drilling locations." 
There is no uniformity of drilling or operating methods; weUs are 
ruined by amateurish and sometimes intentionally vicious methods of 
drilling; bad records are kept, and the entire industry suffers, both 
directly, through less oil being produced eventually, and indirectly by 
the bad morale introduced into the industry as a whole. The legiti- 
mate operator may find an attractive field for investment in the later 
life of such a pool, after it has lost its interest to its owners and they 
are wiUing to sell it cheaply. Wells can be cleaned out or new ones 
drilled and finished properly, and while a one-acre property could 
not be operated profitably after the decline had well set in, a group of 
such properties adjacent to one another can sometimes be handled at a 
profit when bought cheaply. By this time, of course, the original specu- 
lator has wandered to other pastures. 

These speculators profit mainly by turning in properties for stock 
which can be sold in excess of its value, by receiving excessive salaries 
for the quality of services rendered and by extraordinarily heavy com-ii 
mission and bonuses. '■ 



CHOICE OF STRUCTURE 9 

They are nevertheless able to accomplish their sales, largely because 
the public is ignorant of the rate of decline and of the costs of production. 
Their method is to concentrate the buyer's attention on the revenue 
from a newly completed well; their activities are therefore usually 
limited to a field with at least one spectacularly large well. The case 
of Calgary was an exceptional one, in which the extraordinary quality 
of the oil was made to supply the deficiency in size. 

In summarizing the foregoing it should be said that a company 
should not enter a field, at home or abroad, without first being fully 
informed not only as to its oil possibilities but also as to its physical, 
economic and political conditions, and, further, as to the ability of the 
company to adapt its own personnel and plans to these conditions. 

CHOICE OF STRUCTURE 

Attempts have been made to determine a factor representing the 
expectation of success for wells drilled upon structure, as compared 
with " wildcats " drilled with no geological evidence in their favor. 
Such a factor is of doubtful value, because of the danger of too great 
generahzation in the mind of the company executive who wishes to know, 
for instance, how large an appropriation to set aside for such purpose, 
in order that he may be reasonably assured of success within the limits 
he sets himself. The ratio varies in each of the sands in each of the 
major fields, and a ratio worked out can only be a composite of these. 
It could therefore be used only by a company which could afford to 
spread its prospecting over the entire area from which the data are 
drawn. The average company, however, is restricted to one, two, or 
three fields, in which the structures may vary so much from the type 
structure, in certain essentials as to render valueless any general factor. 
In the case of such variations, the individual characteristics of the 
prospect must be the determining features. In other words, even in 
one region, there are structures and " structures." 

The choice of structure for exploration should involve a considera- 
tion of the following conditions: 

1. Stratigraphic section. 

2. Evidence of porosity of sands. 

3. Closeness to production. 

4. Thickness and number of sands. 

5. Proximity to mountain folding. 

6. Faulting. 

7. Size of structure at closing contour and height above it. 



10 CHOICE OF REGIONS 

8. Evidence of steeper or less steep folding with depth. 

9. Evidence of unconformities or convergence from other causes, 
between shallow and deep formations. 

10. Steepness of dip as compared with other oil-producing structures 
in the same field. 

11. Possible gathering area. 

12. Depth of sands. 

As most structures are not productive under the entire fold, it 
frequently happens that the first wells are not successful. There is 
therefore an advantage in the simultaneous drilling of a series of holes 
by various companies, provided one is well protected with acreage on 
various parts of the structure of the supposed field. In this case, each 
of the companies gets the advantage of the combined expenditures of 
all. Thus, when wells are deep and expensive, simultaneous drilling is 
a desirable feature from the standpoint of a company searching for 
leases on structures to be drilled. 

The ideal stratigraphic section consists of thick beds of shale alter- 
nating with relatively thinner, well-bedded porous sands. The shales 
should be, at least in part, somewhat carbonaceous in character. Beds 
of relatively dark bituminous shale or slate are more desirable than 
those of light or bright-colored shales with a correspondingly smaller 
amount of buried organic matter. 

The thickness and number of sands underlying a structure are 
factors which add to its attractiveness. Each additional sand, partic- 
ularly if known to be oil-bearing elsewhere, gives one more chance of 
success in drilling. While the thickness of such oil-bearing sand is not 
in direct ratio to its reservoir content and productivity, nevertheless 
there is usually a noticeable increase with thickness, at least up to 80 
feet. 

The section, however, must not be too sandy, as that condition 
would destroy the tendency of oil to concentrate in certain beds in com- 
mercial quantities. Besides, the excess sand takes up the place which 
should be occupied by the shale source beds in an ideal stratigraphic 
column. 

A structure under which there is known to be only one possible pay 
horizon of perhaps 10 feet in thickness, at a depth of 3500 feet, is not 
so attractive as one containing a number of shallow sands of from 30 
to 50 feet in thickness. However, the deeper pay sand territory will 
presumably not be drilled so closely by small operators, and the original 



CHOICE OF STRUCTURE 11 

operator in a section may get a larger proportion of the flush production 
of a pool. If it is operated wisely there will be less gas lost, and prob- 
ably a greater total proportion of the oil recovered with ewer wells than 
in the shallow territory. 

Owing to the effects of heat and pressure, in large part manifested 
by mountain folding, as one approaches the steep folds toward the 
mountains the reservoirs in the folds are found to be filled with gas, 
with little or no oil. On coming still nearer to the mountains, one finds 
greater cementation or secondary crystallization and no commercial gas. 
This condition is noticeable to a greater degree in the deeper sands, and 
may be measured by the coal rank, expressed as 

fixed carbon 
fixed carbon plus volatile matter 

in any coal that may be present. 

A dome or anticline may be faulted so that the oil has leaked from 
one side of the fault and has been retained on the other, or migration 
may have been arrested at the fault. This is a condition of frequent 
occurrence in the California fields. Frequently the structure on one 
side of the fault is productive, while it contains salt water on the 
other. 

The size of the structure above the lowest closing contour, both 
vertically and laterally, is a rough measure of its comparative value as 
a potential oil-producer, inasmuch as this volume is at the same time a 
measure of the possible volume of the oil reservoir above the water 
table. However, considerations of reservoir shape introduce a large 
error. 

Some fields are characterized by " folds " of differential sagging; that 
is, later sediments laid down on an already folded or irregular sea floor, 
as they compact, will sag away from preexistent ridges or high spots. 
These folds include those in which the major movement took place 
early in the sedimentation and continued with interruptions to a lesser 
degree in the periods coincident with the deposition of the more recent 
sediments. Thus, the dip in the deeply buried beds is much steeper 
than in those at the surface. 

The crests of structures mapped at the surface do not always cor- 
respond with the crest underground. A study of developed structures 
in the same field may show general features of suflScient similarity, so 
as to be of value to the prospector about to drill a wildcat structure 
in the region. For the same reason, the steeper dips in the lower sands 



12 CHOICE OF REGIONS 

may give a producing area which is more restricted laterally than would 
be expected from mapping the surface beds. 

Some of the producing fields in the so-called Wilcox sand in Okla- 
homa are only slightly indicated at the surface. However, as much of 
this area has been drilled over in the shallower sands, and as the incli- 
nation increases in degree with depth, some of the structures are 
mapped by a study of well logs of the shallower sands. 

The degree of dip on untested structure should be compared with the 
dips of producing structures in nearby pools of the same fields. It is 
possible in some cases that folding in the older rocks in fields has so 
opened the crest through jointing as to permit partial loss of contents 
of the reservoir. 

SIGNIFICANCE OF DRY HOLES 

The significance of dry holes is modified by the following considera- 
tions : 

1. Whether or not the holes were drilled on favorable structure. 

2. Whether or not a small amount of oil was found. A small 

quantity, while not practical for further development at pre- 
vailing prices and conditions at the time of drilling, is some- 
times adequate for later development. 

3. Whether the holes were drilled deep enough to test all known 

sands. 

4. Whether they were properly drilled and handled. In a region 

developed with the rotary drill, this is a question which can 
often be answered in the negative. 

5. Whether, with increased prices of oil and better pipe-line facil- 

ities, or as the shallower sands become exhausted, it might not 
become advisable to test deeper sands which underlie the 
region. Sometimes one company controls enough well-placed 
acreage to justify the entire expenditure for such a deep test, 
which should always be located in the most favorable location 
in the pool from a structural standpoint, without reference to 
shallow dry holes. A common error, in making a deep test, 
is to wait until some hole is dry in the shallow sand and con- 
tinue drilling it through to the deep sand, instead of choosing 
the best location. This blunder is all too common and has 
been made by organizations that should have known better. 
Some of the deepest and most expensive dry holes are of this 
sort. The location of deeper tests should receive much more 



GRAPHIC COMPARISON OF FIELDS 13 

consideration and study than the location of ordinary pioneer 
wells. 

Sometimes the acreage is so split up among various com- 
panies as to make it appear more just that, while one company 
may do the drilling, in case of a dry hole the cost should be 
prorated. This is done by making what are known as " dry- 
hole contributions " on the part of the companies interested: 
in the event of success the drilling company pays all costs, 
but in the case of failure the cost is prorated on a previously 
agreed basis. 

Again, these tests of deeper sands are often made on acreage 
lying on structure which has been condemned or abandoned 
in the shallow sands, just before the leases are surrendered, 
in order to make sure that such a course is warranted. Such 
a test may even be made " off structure " to decide whether or 
not to surrender a large block of leases where the annual 
cost of rentals is burdensome. The determining feature in 
such a decision is too frequently merely financial, and there is 
no adequate study from a wide enough basis of data, as to the 
probability of success of such a venture. 

6. Where very strong unconformities are known or supposed to 

exist in deeper formations, particularly if there is faulting in 
the deep sands, a dry hole may be drilled within a few 
hundred feet of the reservoir without giving any indication of 
oil. A careful study of the logs of several such wells may 
give a clue to underground conditions, and lead to the loca- 
tion of the pool. This frequently happens in the Red Beds of 
southern Oklahoma. 

7. By plotting the elevations of key horizons found in the series of 

dry holes, it is sometimes possible to discover a general tend- 
ency of the deep formations to rise in certain directions. Such 
clues have frequently led to the discovery of productive pools 
of oil, lying on the crests of domes not showing in the surface 
formations. 

GRAPHIC COMPARISON OF FIELDS 

A company, before deciding to invent money in one field rather 
than another, should not only consider the cost of acreage, but should 
I make a fundamental comparison of the fields under consideration, 
I preferably by graphic methods, covering the following points: 



14 CHOICE OF REGIONS 

1. Number of producing sands. 

2. Thickness and porosity of '' pays." 

3. Acreage yields. 

4. Decline curves of individual wells and properties. 

5. Number of acres drained per well. 

6. Chance for deeper sands. 

7. Quantity and quality of oil. 

8. Price curve in relation to lifting charges and operating costs. 

9. Competition between refineries and pipe lines for oil from that 

field, now and in the future. In other words, the probable 
market conditions. 
10. Predicted future price curve. 



CHAPTER II 

CLASSES OF HOLDINGS 

Oil and gas rights may be obtained by either the operator or the 
investor in the following ways: 

1. Purchase in fee of the land under which lie the deposits of oil or gas. 

2. Purchase of the oil and gas rights of the land. 

3. Purchase of the mineral rights. 

4. Lease of the oil and gas rights. 

5. Purchase of the royalty interest. 

6. Assignment of rights from a previous holder. 

(1) Purchase of the Land. — If land is very cheap, the right to 
any oil or gas deposit underlying it may be obtained by purchase in 
fee of the surface, as well as the underground rights. With such a hold- 
ing the owner avoids all question of damages to crops, pollution of 
springs, etc., and also possible conflict with the workers of other mineral 
products. If land is remote from oil and gas production and not of 
especial value for farming or other purposes, it may sometimes be 
obtained more cheaply by purchase in fee than by lease or purchase of 
the oil rights. The mere suggestion of oil immediately intoxicates 
certain types of landowners with visions of wealth and leisure, so that 
they are prone to set a higher value upon their property and demand 
a higher bonus or royalty from a lease than the producer can give. 
Conditions sometimes arise, as has been the case in Mexico, where on 
account of unsuitable leasing laws, it is advisable to buy the land out- 
right, even at a high cost. 

On the other hand, agricultural land is generally too costly for pur- 
chase in fee. Sometimes the desire of the farmer to participate in the 
chances of the venture make it unwise to bid high enough to obtain the 
land in fee, as the lease itself is proportionately so much cheaper. 

There are probably comparatively few cases in which conditions are 
so favorable that purchase in fee is advisable, though in such cases the 
method is very advantageous. The purchase is sometimes made after 
production is well developed and the entire surface of the lease has been 
used for operations. 

15 



16 CLASSES OF HOLDINGS 

(2) Purchase of the Oil and Gas Rights Alone. — This method, 
though rarely used, is advantageous, because the holding is more secure 
than a lease and because the purchaser is not hurried into drilling pre- 
maturely, as he might be in order to fulfil the obligations of a lease. Its 
principal disadvantages are that it is not so well known or understood, 
and hence is more difficult to arrange. Here also, as above, the land- 
owner's desire to participate in the chances of the venture frequently 
make the lease relatively cheaper. 

(3) Purchase of the Mineral Rights of the Land. — This method is 
simply an extension of the principle involved in the previous one, the 
rights to all minerals being included. It would make certain the avoid- 
ance of friction with the workers of any other minerals, and would have 
the advantage of concealing the hope of oil, where this hope might in- 
crease the difficulty of obtaining rights from the landowner. It would 
not be advantageous to the oil producer where the minerals, other than 
oil, were of any considerable value. In some states, Louisiana for 
example, mineral rights expire automatically unless the land has been 
proved by development. 

(4) Lease of the Oil and Gas Rights. — This is the most common 
method and therefore the easiest. Its greatest advantage is that the 
operator or investor acquires, and therefore pays for, only such rights 
as he wishes. It does not require an outlay for valuable agricultural 
land, nor the purchase of other minerals, if such happen to be present. 
A lease merely permits the extraction of the oil and gas from the ground 
and makes such arrangements for use of the surface as are necessary to 
facilitate the operation. Furthermore, a lease, by providing for pay- 
ment in the form of a royalty instead of a sum of money to be paid 
whether or not oil is found, relieves the operator of some of the inevi- • 
table risk, and at the same time does not burden him in case oil is dis- 
covered. As a lease is usually obtained for a cash bonus, which varies 
within wide limits, and a promise to drill, a minimum expenditure is 
required at first. Finally, a lease, if properly written, can be readily 
surrendered if the property is proved by neighboring drilling to be 
worthless. 

One disadvantage in the lease lies in the uncertain legal standing 
of some of its provisions. Such matters are, however, gradually be- 
coming settled by modifications of the lease-form to satisfy the courts, 
and little trouble should be experienced with an up-to-date lease. 
Some consideration must be given to the terms of old leases when these 
are acquired by assignment. Another disadvantage is that drilling is 



ASSIGNMENT OF RIGHTS FROM A PREVIOUS HOLDER 17 

often required before market and transportation conditions warrant it. 
This is aggravated by the fact that the landowner is usually very desir- 
ous of having a well on his land at an early date and often refuses to grant 
a lease except on these terms. However, this disadvantage is becoming 
somewhat lessened by the increasing demand for petroleum. 

A lease may be given by an individual, by an association of indi- 
viduals, by a corporation or by a Federal or State Government. While 
the Oil Land Leasing Act of February 25, 1920, provides a permit form 
for exploring the public lands of the United States, the real holding 
that follows a discovery is in the form of a lease. In foreign countries 
the rights obtained from individuals or the grants received from govern- 
ments are of similar nature. 

(5) Purchase of the Royalty Interest. — That interest in the oil 
development which the landowner or lessor retains in the form of royalty 
may be transferred ; and purchase of royalty in whole or in part is often 
made, either by companies or individuals. The purchase of one-half 
the royalty is most frequent. 

If the land is undeveloped, the purchaser of royalty shares the 
same risk, proportional to the expense, that is borne by the lessee of the 
land, although the former is assured a definite percentage of production 
if wells are successful, regardless of operating expense and difficulty. 
If the land is producing, the royalty interest is assured a return, being 
a definite percentage of the property's output. In estimating the value 
of such a royalty however, due consideration must be given to the 
future normal decline of production. This is so commonly underes- 
timated that values of royalties are frequently greatly inflated where 
the wells are large. 

(6) Assignment of Rights from a Previous Holder. — The laws 
relating to oil and gas permit assignment of fee, mineral rights, royalty 
interests or leases, all of which may therefore be obtained not only 
from the original proprietor but, for a consideration, from any later 
holder. A great deal of oil is, in fact, produced on such assigned leases. 
Whereas a lease is most commonly taken originally on undeveloped 
property, by the time of its assignment the property may be partly 
developed, wholly drilled and proved, undrilled but made highly prom- 
ising by neighboring wells or by the possibility of deeper untested sands, 
or otherwise affected by conditions which modify its value and attrac- 
tiveness, frequently increasing its value greatly. 



CHAPTER III 
THE LEASE, FORM AND PROVISIONS^ 

Fundamental Characteristics of Oil and Gas. — Oil and gas possess 
peculiarities of occurrence which have considerable bearing upon their 
possession and development. Chief among these is the capacity, or 
tendency, to flow underground toward a well or wells, regardless of 
property lines at the surface. It was therefore decided, early in the 
history of oil and gas production, that the title to oil and gas does not 
belong to any private owner until they are reduced to actual possession 
by means of .wells drilled on surface property that is owned or leased 
for the purpose. 

An historic decision by the Supreme Court of Pennsylvania com- 
pares them to wild animals. It states that " Water and oil, and still 
more strongly gas, may be classed by themselves, if the analogy be not 
too fanciful, as minerals ferae naturae. In common with animals, and 
unlike other minerals, they have the power and tendency to escape 
without the volition of the owner. Their ' fugitive and wandering ex- 
istence within the limits of a particular tract is uncertain.' They 
belong to the owner of the land and are part of it and are subject to his 
control; but when they escape and go into other land, or come under 

1 For the legal status and considerations of leases, the reader is referred espe- 
cially to the following: 

Thornton, W. W., The Law of Oil and Gas, 3rd Edition, 1918. W. H. Anderson 
Co., Cincinnati. 

Morrison and DeSoto, Oil and Gas Rights, 1st Edition, 1920. Bender-Moss Co., 
San Francisco. 

Rice and Lyons, The Oil Operator in Oklahoma, 1st Edition, 1919. 

Sharnel, C. H., Mining, Mineral and Geological Law, 1907. Hill Publishing Com- 
pany, New York. 

Veasey, J. A., Struggle of the Oil Industry for the Sanctity of its Basic Contract, 
1920. Privately printed, Tulsa, Okla. 

U S. Bureau of Mines, U. S. Mining Statutes Annotated: U. S. Bureau of Mines 
Bulletin 94, 1915, Parts I and II. 

U. S. Bureau of Mines, Abstracts of Current Decisions on Mines and Mining by 
J. W. Thompson: Published from time to time as bulletins for free distribu- 
tion. 

18 



PRODUCER'S LEASE FORM 19 

another's control, the title of the former owner is gone. Possession of 
the land, therefore, is not necessarily possession of the gas. If an 
adjoining or even a distant owner drills his own land, and taps your 
gas, so that it comes into his well and under his control, it is no longer 
yours, but his." 

This applies to oil as well as to gas. The uncertainty of the existence 
of oil or gas has been largely responsible for the use of the lease. In the 
majority of cases the owners of the land have been farmers, who could 
not afford to raise the money necessary for drilling, without more defi- 
nite prospects of success. At the same time few producers were willing 
to risk buying the farm, if it had value as farm land, for the sake of oil 
or gas whose presence was not at all certain. Thus it came about that 
the farmer gave the producer a permit or lease to test his land, at a 
small first consideration, and accepted his reward in the form of a 
royalty if oil or gas were discovered. 

Lease Provisions. — For the transfer of title to oil or gas by means 
of leasing, a form has been developed which includes the following 
general provisions: 

1. Cash consideration 

2. Duration of lease. 

3. Description of leased territory. 

4. Oil royalty. 

5. Gas rental or royalty. 

6. Drilling requirements. 

7. Rental in lieu of drilling. 

8. Protection to landowner against damage to crops, buildings, etc. 

9. Right to surrender lease upon failure to commence drilling well 

or to make rental payments. 

The lease is signed by the lessor, by his wife, if he is married, and 
generally by the lessee. It must be acknowledged or sworn before a 
notary or other authorized person, and is finally filed and recorded at 
the office of the county clerk. 

Producer's Lease Form. — The lease form most widely used in 1921 
is called the '' Producer's 88." It is an evolution of past leases embody- 
ing a treatment of the general provisions that have been proved best 
by past experience. It is as follows: 

^ W. W. Thornton, The Law of Oil and Gas, Vol. I, page 13. 



20 THE LEASE, FORM AND PROVISIONS 

OIL AND GAS LEASE 



AGREEMENT, Made and entered into the day of 19. . . 

by and between 

of party of the first part, hereinafter called lessor (whether 

one or more) and party of the second part, hereinafter called lessee. 

WITNESSETH, That the said lessor, for and in consideration of DOLLARS, 

cash in hand paid, receipt of which is hereby acknowledged and of the covenants and 
agreements hereinafter contained on the part of lessee to be paid, kept and performed, 
has granted, demised, leased and let and by these presents does grant, demise, lease 
and let mito the said lessee, for the sole and only purpose of mining and operating 
for oil and gas, and laying pipe lines, and building tanks, powers, stations and struc- 
tures thereon to produce, save and take care of said products, all that certain tract 

of land situate in the County of State of. . 

Oklahoma, described as foUows, to- wit: 



of Section Township Range and containing. . 

acres, more or less. 

It is agreed that this lease shall remain in force for a term of years from this 

date, and as long thereafter as oil or gas, or either of them, is produced from said 
land by the lessee. 

In consideration of the premises the said lessee covenants and agrees: 

1st. To deliver to the credit of lessor, free of cost, in the pipe line to which he 
may connect his wells, the equal one-eighth part of all oil produced and saved from 
the leased premises. 

2d. To pay the lessor DOLLARS 

each year in advance, for the gas from each well where gas only is found, while the 
same is being used off the premises, and lessor to have gas free of cost from any such 
well for all stoves and all inside Ughts in the principal dwelling house on said land 
during the same time by making his own connections with the wells at his own risk 
and expense. 

3d. To pay lessor for gas produced from any oil well and used off the premises 

at the rate of DOLLARS per year, for the time during 

which gas shall be used, said payments to be made three months in advance. 

If no well be commenced on said land on or before the day of 

19 this lease shall terminate as to both parties, unless the lessee on or 



OIL AND GAS LEASE 21 

before that date shall pay or tender to the lessor, or to the lessor's credit, in the 

. Bank at 

or its successors, which shall continue as the depository regardless of changes in the 

ownership of said land, the sum of DOLLARS, which 

shall operate as a rental and cover the privilege of deferring the commencement of 
a well for months from said date. In like manner and upon like pay- 
ment or tenders the commencement of a well may be further deferred for like period 
of the same number of months successively. And it is understood and agreed that 
the consideration first recited herein, the down payment, covers not only the privi- 
leges granted to the date when said first rental is payable as aforesaid, but also the 
lessee's option of extending that period aforesaid, and any and all other rights con- 
ferred. 

Should the first well drilled on the above described land be a dry hole, then and 
in that event, if a second well is not commenced on said land within twelve months 
from the expiration of the last rental period which rental has been paid, this lease 
shall terminate as to both parties, unless the lessee on or before the expiration of said 
twelve months shall resume the payment of rentals in the same amount and in the 
same manner as hereinafter provided. And it is agreed that upon the resumption 
of the payment of rentals, as above provided that the last preceding paragraph hereof, 
governing the payment of rentals and the effect thereof, shall continue in force just 
as though there had been no interruption in the rental payments. 

If said lessor owns a less interest in the above described land than the entire and 
undivided fee simple estate therein, then the royalties and rentals herein provided 
shall be paid the lessor only in the proportion which his interests bears to the whole 
and undivided fee. 

Lessee shall have the right to use, free of cost, gas, oil and water produced on 
said land for its operations thereon, except water from wells of lessor. 

When requested by lessor, lessee shall bury its pipe lines below plow depth. 
No well shall be drilled nearer than 200 feet to the house or barn now on said 
premises, without the written consent of the lessor. 

Lessee shall pay for damages caused by its operations to growing crops on said 
land. 

Lessee shall have the right at any time to remove all machinery and fixtures 
placed on said premises, including the right to draw and remove casing. 

If the estate of either party hereto is assigned, and the privilege of assigning in 
whole or in part is expressly allowed — the covenants hereof shall extend to their heirs, 
executors, admmistrators, successors or assigns, but no change in the ownership of the 
land or assignment of rentals or royalties shall be binding on the lessee until the lessee 
has been furnished with a written transfer or assignment or a true copy thereof; and it 
is hereby agreed that in the event this lease shall be assigned as to a part or as to 
parts of the above described lands and the assignee or assigns of such part or parts 
shall fail or make default in the payment of the proportionate part of the rents due 
from him or them, such default shall not operate to defeat or affect this lease in so 
far as it covers a part or parts of said lands upon which the said lessee or any assignee 
thereof shall make due payment of said rental. 

Lessor hereby warrants and agrees to defend the title to the lands herein described, 
and agrees that the lessee shall have the right at any time to redeem for lessor, by 
payment, any mortgages, taxes or other hens on the above described lands, in the 



22 THE LEASE, FORM AND PROVISIONS 

event of default of payment by lessor, and be subrogated to the rights of the holder 
thereof. 



In Testimony Whereof We Sign, this the day of 19. . . . 

Witness: (Seal) 

(Seal) 

(Seal) 

.• (Seal) 



The " Producer's 88 " for Oklahoma may be analyzed as follows: 

(1) Cash Consideration. — This may be merely a nominal consid- 
eration of one dollar, or a bonus of greater amount, proportionate to the 
value of the leased tract. 

The one dollar consideration was originally inserted for the purpose 
of fulfilling the legal requirement that a contract have mutuality. It 
has since been decided in some courts that where the lease contains a 
binding covenant of any sort, such as a duty to pay rent or royalty, or 
to drill a well, which practically all leases do contain, there is no need 
of this nominal consideration. Nevertheless, it is usually given, largely 
from custom perhaps, but also as prima facie evidence that the lease is 
not unilateral. In Louisiana a lease is hardly secure, even wiih a 
nominal consideration, until rental has been paid, or a well started. 

A bonus is a premium, usually expressed as an amount per acre, 
paid for the privilege of the lease, where the value of the land seems to 
warrant it. A bonus may be anything from a few cents to more than 
a thousand dollars per acre and in general depends on the proximity to 
production. 

Values of undrilled tracts are judged principally on the idea that the 
nearer a property lies to producing wells, the greater is its chance of 
becoming a producer. At the same time, acreage which is obviously 
more favorably situated from a geological standpoint will, of course, 
command a higher bonus than that which is ''off structure " or other- 
wise inferior, even though in the same neighborhood. The influence 
of this factor upon value varies with other geological conditions and 
with the extent to which geological considerations influence the buyer. 

(2) Duration of Lease. — In new leases in inactive territory, the 
time allowed for the completion of a well may be extended, by delay 



OIL ROYALTY 23 

rentals, to ten years; but in older leases it is usually limited to five- 
years. In actively producing regions this time may be greatly short- 
ened. Whatever the term stated, the lease nearly always provides " or 
as long thereafter as oil or gas is produced therefrom in paying quan- 
tities." 

(3) Description of Leased Territory. — This must be carefully given, 
for the law declares that if the tract cannot be located from the descrip- 
tion without arbitrary discretion, or without resort to parol evidence, 
the description is not sufficient. 

The description by township, range, and section of acreage surveyed 
under the public land system of the United States is definite enough to 
avoid danger of confusion, except that irregular fractions must be 
described with great care. In the eastern part of this country, a farm 
is usually described by naming the farms which bound it on all sides. 
Where this may be ambiguous, metes and bounds are used. 

(4) Oil Royalty. — The most common royalty is one-eighth, or 12J 
per cent, and it may be paid either in oil or in cash, according to stated 
agreement. Other royalties, such as one-tenth, one-seventh, one-sixth, 
one-fifth, one-fourth and one-third, are sometimes given, although 
one-tenth is seldom seen except in old leases. The leases on the Osage 
Indian Reservation in Oklahoma call for one-sixth royalty on most 
wells. 

Where a royalty greater than one-eighth is given, it generally 
results in a reduction of bonus, or takes the place of bonus, for in prac- 
tice the various forms of remuneration tend to supplant one another. 
It is generally considered among producers, however, that one-fifth, or 
20 per cent, is the maximum royalty that should be paid for a lease, as 
depletion so soon reduces a well to a point where a higher royalty would 
force abandonment or a new lease at reduced royalty. 

In most cases royalty is fixed; that is, the rate estabhshed at the 
beginning is continued unchanged throughout the life of the wells. 
But production decreases with age, and in the course of time the seven- 
eighths remaining to the lessee may become so small as to render the 
wells unprofitable, even though a small amount of oil might still be 
produced for a long time. The life of such wells might be prolonged by 
means of a royalty which would decrease when the production of the 
well became too low for profitable operation at the old rate. This 
would benefit both the lessor and the lessee, and work in the interest 
of conservation. Royalties of this type have been called " sUding 
royalties." 



24 THE LEASE, FORM AND PROVISIONS 

An example of sliding royalty may be found in the Oil Land Leas- 
ing Act, where two schedules are used, one calling for higher royalty 
from wells producing lighter oil of more than 30° Baume gravity, and a 
lower one for the heavier oils under 30° Baume. Graduations are 
based upon productions in barrels per day, and in the preference lease 
following a permit, are as follows : 

(1) For Oil Above 30° Be. 

Per cent 
Wells producing up to 20 bbls. per day, 12| or |^ royalty. 



20 " 50 


K 


m " i 


50 " 100 


U 


20 " i 


100 " 200 


U 


25 " i 


over 200 


u 


33 " i 



(2) For Oil Below 30° B^. 

Per cent 

Wells producing up to 20 bbls. per day, 12| or ^ royalty. 

20 " 50 " 144 " I 

50 " 100 " 16| " i 

100 " 200 " 20 " i 

over " 200 '' 25 " i 

While it is not usually possible to make a two-fold classification on 
the basis of gravity of the oil, a graduation such as this, which decreases 
the royalty as the production decreases, is fundamentally correct, even 
though the percentages listed above are too high for some fields. In 
spite of these obvious advantages, sliding royalties are not as yet often 
used. 

A sounder method of sliding royalties has been proposed by the senior 
author^ based on an exemption from all royalty or a very low royalty 
on a certain fixed amount of the well's production, the oil above that 
amount being subject to the agreed rate. This method reduces the 
royalty regularly instead of by jumps, and hence avoids friction and 
disputes as to the exact time of the jump. 

(5) Gas Rental or Royalty. — The lessee generally pays an annual 
rental for a successful gas well, where the gas is used off the premises. 
This rental may be $100 or $150, or even more if gas is much in demand. 
Rental may also be paid for gas from an oil well, where that gas is in 
sufficient amount to be sold off the lease. 

1 Johnson, Roswell H., Sliding Royalties for Oil and Gas Wells: Trans. Am. 
Inst. Min. Eng., Vol. 52, pp. 322-328. 



DRILLING REQUIREMENTS 25 

A gas royalty is not used very often, on account of the expense of 
metering. However, it may be used where gas lands are in great 
demand, as in the McKeesport boom, or where the depletion is so rapid 
as to lead the producer to believe that the fixed rental may not be 
warranted up to the end of the year, while the gas is valuable enough to 
justify the production of even small amounts from the well. Difficulties 
are met with in the measurement of gas, and leases which provide for a 
royalty on gas specify in considerable detail the method of measurement 
to be employed. Where a royalty is used, a sliding royalty is desir- 
able for gas as well as for oil. 

Due to the recent importance of the manufacture of gasoline from 
natural gas, leases should make provision for gas used for this pur- 
pose. 

It is customary to ignore the quality of gas in the lease, but a very 
few leases or lease drafts have had reference to helium or to the number 
of thermal units in the gas. 

(6) Drilling Requirements. — Most leases require that a well be 
drilled, although delay in the commencement of the well is usually 
permitted upon the payment of rentals, usually quarterly, sometimes 
annually. The drilling requirement is liable to be made stricter in a par- 
tially developed region than in wildcat country, by increasing the delay 
rental and the frequency with which it must be paid. 

The lease often specifies that a certain depth must be reached. This 
is because the landowner desires a test of some well-known sand, such as 
the Bartlesville of Oklahoma, the Marble Falls of Texas, or the Wood- 
bine of Louisiana, and demands a depth which promises to go through 
this horizon. Such a clause, however, generally permits a well to stop 
at shallower depth if paying quantities of oil or gas are found. The lease 
may, however, demand that sooner or later a well must go down to the 
deeper horizon. In place of the depth requirement, a lease may state 
that a certain sand must be tested, which works out well if there is no 
question about the identity of this sand, but leads to dispute if there is 
any uncertainty. Occasionally a lease requires that the well reach a 
well known horizon known to underlie the sand, in order to avoid un- 
certainty, as Oklahoma leases formerly demanded that a well go to the 
Mississippi Lime, which is below the Bartlesville sand. 

Where the lease requires that drilling operations shall commence 
within a certain time, or before a certain date, the bringing of lumber 
on to the premises, for the purpose of building a derrick, is good com- 
pliance, the starting of actual drilling within the time not being essential. 



26 THE LEASE, FORM AND PROVISIONS 

A common requirement is that the well must be completed, subject to 
unavoidable delays. 

Diligence of operation is necessary, however, and a covenant to 
commence drilling within a fixed period is not performed by starting 
work and then indefinitely suspending it. The law also holds that 
neither lessor nor lessee can be made the arbiter of the extent to which, 
or the diligence with which, the operations shall proceed, but that both 
shall be governed by the standard of what is reasonable. No obliga- 
tion rests on the lessee to carry the operations to a point where they 
would be unprofitable to him, even if some benefit to the lessor would 
result therefrom. 

There is an implied covenant on the part of the lessee that he will 
put down enough wells to protect the leased premises from being drained 
by wells on adjacent territory, and such protection may rightly be de- 
manded by the lessor. He cannot rightfully demand, however, that 
every " offsetting well " be met, if they are far too numerous for sound 
economy. 

(7) Rental in Lieu of Drilling. — At the present time, most leases 
give the operator the option of drilling or paying delay rentals. One 
dollar per acre per year, payable quarterly, is quite common. 

(8) Protection to Landowner. — The landowner retains the right 
to the surface, except in so far as part of it may be needed by the lessee 
for operating purposes; and the lease protects the lessor from undue 
damage to crops or buildings. In an 80-acre tract, not more than 5 or 6 
acres are usually necessary for operation. 

Land in the oil fields is not often valuable enough to impose restric- 
tions upon the lessee; but where it is, he stands damages to growing 
crops, etc. Pipe lines can be buried below plow depth, but pull rods 
for pumping are sometimes a source of trouble to the farmer, because 
they are above the surface, or generally very near the surface if 
buried. 

(9) Right to Surrender Lease. — The right of the lessee to sur- 
render a lease that is obviously of no further value is sometimes defi- 
nitely expressed and sometimes implied by rental and drilling clauses. 
Although a surrender clause so worded that the lessee can drop the lease 
at will has been the cause of uncertainty and legal contention, never- 
theless, the right of surrender itself has been generally supported by the 
courts. The uncertainty of the existence of oil or gas makes it entirely 
just that the lessee should have the right to surrender a lease when it 



FILING AND RECORDING THE LEASE 27 

is shown by tests in the vicinity that oil and gas are not likely to be 
present. The " Producer's 88 " lease, is so worded that the lease 
does not run beyond the date set for a well, unless extended by a rental, 
a form which avoids many of the objections to the early surrender 
clauses. 

In many leases the surrender is not automatic but must be brought 
about by a notice of surrender sent to the lessor, an objectionable 
feature because needlessly troublesome. The right of surrender, how- 
ever, does not give the lessor the corresponding right to cancel the 
lease at will, since the lessee must have a definite security of status to 
warrant him in laying his plans for development. 

Signing of the Lease. — The lease is signed by the lessor, whether 
one or more. The lessee does not have to sign the lease to make it bind- 
ing, since his acceptance is sufficient. As a matter of fact, however, 
he usually does sign it and it is better that he should. 

If a man alone is a lessor, it is best to sign as " John Doe, Single " 
or " John Doe, Widower," so that there can be no necessity for in- 
quiring why a wife did not join him. A wife should join her husband 
in the lease of his lands, for if she does not do so, upon his death she 
may assert her marital rights to the detriment of an existing lease 
given by the husband alone. In case of a homestead, those states 
which require the wife's signature to make a transfer of a homestead, 
also require the same to make an oil and gas lease valid. 

Acknowledgment of Lease. — A lease must be sworn to, although 
some states are stricter than others in confining the acknowledgment 
right to certain details of wording that are not universally required. 
In Texas, for example, leases must include in the acknowledgment a 
statement that it was executed for the purposes and " consideration" 
therein expressed. 

The acknowledgment is one of those portions of the lease concern- 
ing which specific state laws should be carefully ascertained. In the 
Appendix, acknowledgment forms for several states are given. 

Filing and Recording the Lease. — A lease should sooner or later 
be filed and recorded at the office of the county clerk. Fifing and 
recording may be postponed indefinitely if it is the desire of the lessee 
to keep secret the fact that leasing is going on. This may however, 
lead to trouble, for if a lease is not recorded the lessor may lease again, 
and the second lease is good if recorded first and if it can be shown 
that the second lessee did not know of the first lease. The first lessee 



28 THE LEASE, FORM AND PROVISIONS 

can only recover by means of criminal action against the lessor; and 
the difficulties of this action, together with that of proving that the 
second lessee was not aware of the first lease, are so great that a 
compromise is usually resorted to in place of legal action. 

Assignment. — The lease form sometimes has added to it a blank 
for the first assignment of a lease. 



CHAPTER IV 
TECHNIQUE OF LEASING 

Since much more of the earth's surface is utiHzed as farm land than 
is covered by cities, towns, and villages, it follows that most of our 
oil and gas pools are found in farming or ranch country. This is es- 
pecially true because few fields happen to have been found in thickly 
settled parts, such as New England, New York, and eastern Penn- 
sylvania. It is the farmer, therefore, with whom the leaser has to 
deal in the great majority of cases. 

The leaser generally finds the farmer in the producing counties more 
or less versed in the business of oil and gas production and often with 
pronounced ideas as to the terms to be proposed, especially in respect 
to early development. On the other hand, in non-producing counties, 
the farmers often know nothing of the business or of lease forms and 
readily sign the form offered, so eager are they to encourage the oil 
man. At the same time, the leaser, acting for the lessee, has in mind 
a definite limit appropriate to the attractiveness of the acreage. Hence, 
while a lease is sometimes secured easily, in other cases a compromise 
may be necessary, or it may even be impossible for the parties con- 
cerned to come to any agreement whatever. In fact, it is not often 
that an operator succeeds in leasing all the tracts in an area. Some 
farms are sure to be left for any succeeding operator who will offer 
better terms, and in rare instances a few farms will remain unleased until 
the development of a field is in full progress. 

Leasing may be done by: 

1. Members of the land department of a company, either regular 

employees or leasers employed for the occasion. 

2. Members of other departments who assume this additional 

work on occasions. 

3. Independent leasers who will later market their leases with 

operators. 

The larger companies have land departments, and leasing is alto- 
gether in the hands of employees of these departments. 

In the smaller companies it may fall to members of other departments, 

29 



30 TECHNIQUE OF LEASING 

such as scouts or geologists, to do the leasing or help with it when a 
leasing campaign is in force. The geologist is especially likely to be 
called on to lease or work with leasers, as he is better able to give quick 
decisions on the proper territory to acquire or the relative desirability 
of offerings. On the other hand, the geologist may have less ability in 
getting leases, because he has had less experience, and because the 
technical or engineering viewpoint is so different from that of the trader 
or land man that both viewpoints are seldom highly developed in one 
individual. Furthermore, his efforts, to lease, following his geologic 
examination, may lead the farmers to believe that the land is very 
promising, and thus cause them to ask high premiums for it. 

An independent leaser may be a broker or speculator, or he may have 
an understanding with a company to procure certain blocks of leases 
and later assign them at a fixed price — at a commission or for pay- 
ment by the day. He is often an inhabitant of the region being leased, 
and therefore especially well acquainted with the people themselves, 
the extent of their property, and their customs. When this is not the 
case, such a man is frequently employed as notary and assistant. A 
local bank of relative prominence and repute is of the greatest assist- 
ance to the oil man in acquiring his leases, as well as in developing them, 
and the operator does well to make himself known there at an early 
stage. 

Brokers and speculators make every effort to get into new territory 
ahead of the companies and are so active that it is generally necessary 
for operators who want to take up a block of leases for a test to acquire 
a certain amount of acreage from them. In spite of the fact that they 
may be very capable leasers, and that they save the companies the 
expense of putting in so many of their own men, they are nevertheless 
of very doubtful service, or even an obstacle to the actual producer of 
oil or gas. This is because the independent leaser is seldom a true 
broker, who buys and sells for a commission profit, but is usually a 
speculator as well, getting leases for little or nothing, as the companies 
might have done if they had tried in time, and holding them at the 
highest price the market will bear. The speculator's profit, then, is 
far greater than the cost of leasing would be to the operator if the 
leaser chose an area of increasing demand. He, of course, has his 
losses when he has erred in the choice of acreage. 

On the other hand, companies often employ local agents to get acre- 
age for them. The agent may take these leases in his own name, con- 
cealing or not concealing the name of the company, as conditions 



TECHNIQUE OF LEASING 31 

demand. The greatest advantage of this method is that the company 
can thus utiUze the famiharity of the agent with the people and their 
customs. This advantage is even more important in foreign fields than 
in this country. The leases can readily be assigned to the company, 
provided the honesty of the agent is above suspicion. The agent 
method is convenient also where any individual or group, less familiar 
with oil production than the regular companies, desires leases in some 
chosen locality. 

The leaser is able to offer the landowner the following considerations 
to induce him to lease: 

1. A bonus. 

2. Rental until oil is produced. 

3. A percentage or royalty of the oil marketed. 

4. A gas- well rental or gas royalty. 

5. A test well. 

(1) Bonus. — Since the bonus depends largely on the distance 
from production, the lease man generally makes the farmer a fairly 
definite offer, dependent upon obvious conditions. In purely wild- 
cat territory this offer is not often refused, even though it is very small, 
but where the prospects for production seem bright, the bonus may have 
to be settled by considerable bargaining. The farmer who asks a large 
bonus is likely to have the viewpoint that he is unwilling to accept the 
hazards of the business, and prefers his return at once, leaving the 
operator free to do as he pleases, once the lease is given. Another class 
of landowners, however, may be anxious to share the risks, and to re- 
ceive the smaller bonus, provided royalty and test-well provisions are 
made more favorable. 

Competition among the oil men often results in high bonuses. 
Company leasers make great efforts to obtain a block of leases with- 
out the knowledge of other companies, but are not always successful. 
It so happens, therefore, that a second lessee will raise the whole level 
of bonuses by offering more than the first company in order to obtain 
an acreage in the block. Such acreage is valuable because the de- 
velopment plans of the original producer give the second one a test 
without expense. 

(2) Rental. — The owner generally accepts the amount of rental 
which is standard for the neighborhood. Delay rental is likely to be 
of more concern to the company than to the lessor, since the aggregate 
acreage held in reserve calls for an annual payment that may easily 



32 



TECHNIQUE 01 LEASING 



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TECHNIQUE OF LEASING 33 

grow to large proportions. The burden of paying rentals exercises a 
powerful influence upon the amount of acreage which a company can 
carry undeveloped from year to year. 

(3) Royalty. — One-eighth is standard royalty, but in rare cases 
the lessor may demand more, even at the sacrifice of his bonus. A 
royalty of 50 per cent, with no bonus, had to be paid for one lease in 
the Gushing pool of Oklahoma. With any royalty, but more particu- 
larly with a royalty higher than one-eighth, the farmer will find it to 
his advantage to agree to a reduction when the well approaches ex- 
haustion; but such later bargaining can well be avoided by means of 
a sliding royalty. In areas far from production, a one-tenth royalty 
is still sometimes obtained, but there is a tendency to give one-eighth 
and extend the time allowed for starting a well or have a lower delay 
rental stipulated in the lease. 

(4) Gas rental or royalty. — There is not much variation in this 
clause, the leaser merely finding it necessary to offer a larger gas rental 
where only gas is expected, or where the gas is in strong demand. Gas 
royalty is common only where the wells are quite small or under the 
excitement of a boom, as at McKeesport. 

(5) Test well. — A test well is the most urgent demand of many 
farmers; and this is very natural where there has been little bonus and 
they must look to the royalty for their return. They feel that their 
farms should be tested in earnest rather than become a mere object of 
speculation to others. Furthermore, the great return derived from 
royalties, where the wells are large, is an attractive prospect. Many 
leases can be obtained through the promise of a test where no other 
consideration will satisfy. The leaser will do well to show the pros- 
pective lessor such a table as the following (Fig. 1), showing the 
income for a year from a variety of prices of crude oil and of yields of 
oil. The popular underestimate of the rapidity of decline of wells 
works to the interest of the leaser. 

On the other hand, the leaser cannot afford to grant many wells 
without the option of paying delay rental in lieu of drilling. If the 
leases are being taken for speculation, enough time must be allowed 
for their profitable transfer; at the same time, a purchaser does not 
want to buy leases with drilling requirements that would be a hardship. 
If the leases are taken by a company, there must frequently be a delay, 
since the company may have already planned a program of drilling to 
the limit of its capacity, or, in times of depression, its production may 
already be as great as it can market. 



34 TECHNIQUE OF LEASING 

A well is therefore a very attractive consideration to the landowner, 
but a difficult one for the lessee to grant. Mutual agreement is always 
hastened by any proposition from the latter looking toward a reason- 
able development of the neighborhood as a whole. 

The leaser may also emphasize any of the lesser provisions, such as 
protection to buildings and crops, gas for domestic use, etc., provided 
they seem to appeal to the individual. 



II 



I 



I 



CHAPTER V 
OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

RIGHTS OBTAINED THROUGH THE PLACER LAW 

Origin and Application of the Placer Law. — The provisions of the 
Placer Law had their origin in the code of rules formulated by the 
gold miners of California and Nevada in 1849 and the years immediately 
following. This code was made Federal Law by the Acts of 1870 and 
1872, which were then incorporated into the Revised Statutes, and 
are the mining laws of the present day. The Placer Law applies only 
to the public lands of the United States. 

It was many years after the discovery of petroleum and the establish- 
ment of the Placer Law, before the jurisdiction of this law was definitely 
extended to oil and gas rights on the public lands. This was mainly 
because the public lands were chiefly in the western part of the country 
where the oil and gas possibilities were not recognized at first. As 
late as 1896, although the location of some petroleum lands had been 
made under the Placer Law, there was considerable doubt of its applica- 
tion, and the legal propriety of such a location had not been definitely 
decided. The first location of this kind seems to have been that of 
March 22, 1880, for mineral entry No. 18, Los Angeles District, Cali- 
fornia. The decision was made finally, however, by Congress in the 
act of February 11, 1897, (29 Stat. 526), in which it is provided: " that 
any person authorized to enter lands under the mining laws of the 
LTnited States, may enter and obtain patent to land containing petroleum 
or other mineral oils and chiefly valuable therefor, under provisions of 
the laws relating to placer mineral claims." This act definitely put the 
patenting of oil lands under the Placer Law, in spite of the fact that 
this law, based on practices that had grown up in gold mining, was 
wholly unsuited to the characteristics of oil and gas pools. To make 
oil and gas lands subject to such a law was a legislative blunder, of which 
confusion, uncertainty, litigation, bad feeling and even violence were 
the natural results. 

Provisions of the Placer Law. — The provisions of the Placer Law 
may be stated briefly as follows: 

35 



36 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

(1) Location. — A qualified claimant must " locate " the tract of 
land of which he desires possession, and after he has made his choice of 
location, it must be " distinctly marked on the ground so that its bound- 
aries can be readily traced." (Revised Statutes 2324.) Further local 
and state laws may require, in various ways, a posted notice and the 
recording of the application and location with a specified district or 
county officer. 

A valid location gives the locator " Exclusive right of possession and 
enjoyment of all the surface included within the lines " of the claim. 
(Revised Statutes 2322.) 

(2) Discovery. — A qualified person, however, may not lay claim 
to a tract of public land until he has made a discovery of mineral thereon. 
A location must be based on a discovery. 

In the case of a placer deposit of gold, platinum or other similar 
mineral, a discovery is easily made and seldom requires more than a 
hand-dug trench a few feet deep. In the case of petroleum, however, 
surface evidences were not accepted, and discovery had to be made by 
a well sunk to a horizon which would ultimately produce commercially, 
whether a hundred feet or several thousand feet below the surface. As 
to the amount of oil necessary to constitute a discovery, one Wyoming 
State Court decision held that the discovery need only be such as to 
warrant a reasonably prudent man in continuing work. The Land 
Office, on the other hand, persistently asked for something more nearly 
approaching a true commercial discovery. 

(3) Size of claim. — The claim may comprise 20 acres if located by 
an individual, or if made by an association, 20 acres for each member 
thereof; but in no case may it exceed 160 acres. Since even 160 acres 
is too small in practice, no 20-acre claims were taken, except under 
extraordinary circumstances. There is no limit to the number of claims 
which may be located by a single individual or association, although, 
if more than one, they must not be adjacent. A device by which a 
party of nine men take adjacent claims, by dropping one name in rota- 
tion, has been common and is apparently accepted by the Land Office. 

(4) Assessment work. — After having made a valid location, and 
being thus entitled to the exclusive right of development, the claimant 
must expend not less than $100 worth of labor or improvements upon the 
claim during each year. The claimant has until the end of the calendar 
year succeeding his location, in which to perform his first assessment 
work, and thereafter the calendar year is the period for which such work 
is required. 



INAPPLICABILITY OF PLACER LAW 37 

(5) Patent. — After not less than $500 worth of labor and improve- 
ments has been put into the claim, and proof of discovery made, the 
claimant may obtain patent on payment to the government of $2.50 
an acre, and upon fulfilling certain requirements as to posted notices, 
pubUcation and survey of claim, etc. This gives the claimant the full 
title in fee to the land. 

Inapplicability of Placer Law to Oil and Gas Deposits. — In the 
application of the Placer Law to oil and gas claims, a great difficulty 
arose in the operation of the discovery provision. A period of possession 
is necessary in an oil claim prior to discovery, since a discovery of oil 
has to be made by means of a drilled well. But the law does not pro- 
vide the claimant with any period of possession until a discovery has 
been made. In the difficulties arising over this requirement, the courts 
attempted to give a sort of protection, but it was extremely vague. 
It seems to have been agreed that a claimant could not be ousted by force 
or fraud from his possession prior to discovery, but that an adverse 
claimant might enter the land peaceably, in good faith and in compli- 
ance with the law, and also proceed to make discovery on the same 
tract. The courts, however, did not define the extent to which a 
prior occupant might go to prevent a peaceable and open entry, which 
might result finally in a prior discovery, with the result of displacing 
the one who first started operations. This uncertainty of possession 
caused many troubles for those who claimed oil lands under the Placer 
Law, and furthermore discouraged many others who might have initi- 
ated claims. 

The feature of the Placer Law which most seriously unfitted it for 
application to oil was the amount of land to a claim, namely, 160 acres. 
This is quite inadequate to offer the necessary reward for the heavy 
expenses and risk of pioneer wildcatting. The result was that real 
tests were not made as the law contemplated, but one of two subterfuges 
was resorted to; either more than one claim was obtained by indirection, 
or else cheap, shallow w^ells, sometimes referred to derisively as " post 
holes," were put down to get a mere " rainbow " of oil from the shales 
in order to warrant affidavits that oil had been " discovered." 

A second weakness of the law was that had its spirit had been actually 
carried out, so that the new pioneer field was cut up into separate 
operating units of 160 acres each, these could not be economically 
operated because of the many duplicated organizations in the district 
and the failure to pool information. 



36 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

(1) Location. — A qualified claimant must '' locate " the tract of 
land of which he desires possession, and after he has made his choice of 
location, it must be '' distinctly marked on the ground so that its bound- 
aries can be readily traced." (Revised Statutes 2324.) Further local 
and state laws may require, in various ways, a posted notice and the 
recording of the application and location with a specified district or 
county officer. 

A vaHd location gives the locator '' Exclusive right of possession and 
enjoyment of all the surface included within the lines " of the claim. 
(Revised Statutes 2322.) 

(2) Discovery. — A qualified person, however, may not lay claim 
to a tract of public land until he has made a discovery of mineral thereon. 
A location must be based on a discovery. 

In the case of a placer deposit of gold, platinum or other similar 
mineral, a discovery is easily made and seldom requires more than a 
hand-dug trench a few feet deep. In the case of petroleum, however, 
surface evidences were not accepted, and discovery had to be made by 
a well sunk to a horizon which would ultimately produce commercially, 
whether a hundred feet or several thousand feet below the surface. As 
to the amount of oil necessary to constitute a discovery, one Wyoming 
State Court decision held that the discovery need only be such as to 
warrant a reasonably prudent man in continuing work. The Land 
Office, on the other hand, persistently asked for something more nearly 
approaching a true commercial discovery. 

(3) Size of claim. — The claim may comprise 20 acres if located by 
an individual, or if made by an association, 20 acres for each member 
thereof; but in no case may it exceed 160 acres. Since even 160 acres 
is too small in practice, no 20-acre claims were taken, except under 
extraordinary circumstances. There is no limit to the number of claims 
which may be located by a single individual or association, although, 
if more than one, they must not be adjacent. A device by which a 
party of nine men take adjacent claims, by dropping one name in rota- 
tion, has been common and is apparently accepted by the Land Office. 

(4) Assessment work. — After having made a valid location, and 
being thus entitled to the exclusive right of development, the claimant 
must expend not less than $100 worth of labor or improvements upon the 
claim during each year. The claimant has until the end of the calendar 
year succeeding his location, in which to perform his first assessment 
work, and thereafter the calendar year is the period for which such work 
is required. 



INAPPLICABILITY OF PLACER LAW 37 

(5) Patent. — After not less than $500 worth of labor and improve- 
ments has been put into the claim, and proof of discovery made, the 
claimant may obtain patent on payment to the government of $2.50 
an acre, and upon fulfilling certain requirements as to posted notices, 
pubUcation and survey of claim, etc. This gives the claimant the full 
title in fee to the land. 

Inapplicability of Placer Law to Oil and Gas Deposits. — In the 
application of the Placer Law to oil and gas claims, a great difficulty 
arose in the operation of the discovery provision. A period of possession 
is necessary in an oil claim prior to discovery, since a discovery of oil 
has to be made by means of a drilled well. But the law does not pro- 
vide the claimant with any period of possession until a discovery has 
been made. In the difficulties arising over this requirement, the courts 
attempted to give a sort of protection, but it was extremely vague. 
It seems to have been agreed that a claimant could not be ousted by force 
or fraud from his possession prior to discovery, but that an adverse 
claimant might enter the land peaceably, in good faith and in compli- 
ance with the law, and also proceed to make discovery on the same 
tract. The courts, however, did not define the extent to which a 
prior occupant might go to prevent a peaceable and open entry, which 
might result finally in a prior discovery, with the result of displacing 
the one who first started operations. This uncertainty of possession 
caused many troubles for those who claimed oil lands under the Placer 
Law, and furthermore discouraged many others who might have initi- 
ated claims. 

The feature of the Placer Law which most seriously unfitted it for 
application to oil was the amount of land to a claim, namely, 160 acres. 
This is quite inadequate to offer the necessary reward for the heavy 
expenses and risk of pioneer wildcatting. The result was that real 
tests were not made as the law contemplated, but one of two subterfuges 
was resorted to; either more than one claim was obtained by indirection, 
or else cheap, shallow wells, sometimes referred to derisively as " post 
holes," were put down to get a mere '^ rainbow " of oil from the shales 
in order to warrant affidavits that oil had been " discovered." 

A second weakness of the law was that had its spirit had been actually 
carried out, so that the new pioneer field was cut up into separate 
operating units of 160 acres each, these could not be economically 
operated because of the many dupHcated organizations in the district 
and the failure to pool information. 



38 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

WITHDRAWAL OF PUBLIC LANDS FROM LOCATION 

Purpose and History. — The only way to correct the objectionable 
features of the Placer Law in its appHcation to petroleum lands was to 
suspend the operation of the law. It was not feasible to let things go 
on until Congress could pass a law, because of the long time such a 
process would require, as demonstrated by the ten and one-half years 
(1909 to 1920) that it took Congress to pass the present law. This 
suspension of operation was therefore effected by withdrawing from 
petroleum location all public lands which gave promise of production. 

At the same time, the necessity of an oil-fuel supply for the navy 
became evident, and the withdrawal of possible producing territory 
had for its second purpose the assurance of this supply in the future. 

Sources of Specific Information on Withdrawals. — The United 
States Geological Survey published during 1916 a bulletin numbered 
623, by Max Ball, entitled " Petroleum Withdrawals and Restorations 
Affecting the Public Domain." This bulletin gives all withdrawals 
and restorations in detail to January 15, 1916. The states of Arizona, 
California, Colorado, Louisiana, Montana, North Dakota, Utah and 
Wyoming are included; the areas affected are shown on maps accom- 
panying the bulletin, and are also described by section, township and 
range. 

Appendix A of Bulletin 623 gives withdrawals and restorations 
from January 16 to September 30, 1916. From that time until the pas- 
sage of the Act of February 25, 1920, the United States Geological 
Survey put this information before the public in the form of mimeo- 
graph sheets, issued whenever necessary. 

FEDERAL OIL AND GAS ACT OF FEBRUARY 25, 1920 

The Leasing Act of February 25, 1920, formally put an end to with- 
drawals for the purpose of conservation and better regulation, while 
providing for possible future withdrawals for naval use. It likewise 
restored all withdrawn lands, except those for naval reserves, and for 
such other special uses as are noted in the bill. 

In a sense, the withdrawals have been replaced by proclamations to 
the effect that certain lands lie within the structure of a producing oil 
or gas field, and are therefore subject to lease, but not to an exploring 
permit. 

In general, the Act provides for exploration, under a prospecting 
permit, of withdrawn lands which are not on a structure producing 



FEDERAL OIL AND GAS ACT 39 

oil or gas, and for the final development, under a lease holding, of with- 
drawn lands on the same geologic structure with production. 

The area covered by a permit consists of a maximum of 2560 acres, 
that is, 4 sections of 640 acres each. It is obtained by making applica- 
tion to the proper district land office, where the application is held for 
j thirty days to enable conflicting claims to be presented, and then for- 
i warded to the Commissioner of the General Land Office for final decision 
and award. Tenure is two years in the States and four years in Alaska, 
with correspondingly easier drilling requirements in the latter territory. 
Permits are issued not only on lands wholly unclaimed, but also on 
claims staked under the Placer Law, where no valid discovery has been 
made. 

The greatest weakness of the law is the priority privilege, by which 
one placing a notice on the land has thirty days in which to make appli- 
cation, during which time he has priority rights. This leaves the door 
wide open to perjury as to the time the stake was set. In other words, 
the lease belongs to the one first complying with a regulation under 
conditions which make it impossible for the government to check the 
accuracy and reliability of the statements made; whereas the decision 
might be made to depend upon the time of filing at a government office, 
which can be known with accuracy and surety. It is to be hoped that 
this defect will yet be remedied. 

Leases are of several kinds, as follows: 

(1) Lease following permit. — The discovery of oil or gas in an area 
prospected under a permit, entitles the holder to a lease of one-quarter 
of the area of the permit for twenty years, with ten-year extensions, at 
a 5 per cent royalty (no royalty for the first five years in Alaska). 

(2) Preference lease following permit. — The successful permittee 
also has a preference right to a lease on the remainder of his permit, 
at sHding royalties fixed by the Secretary of the Interior. 

(3) Lease at auction. — Unappropriated or withheld acreage within 
the known geologic structures of producing oil and gas fields are offered 
at occasional auctions in blocks not exceeding 640 acres. Only one 
auction has so far been held. Bidding was strong and high prices were 
reaUzed. Unfortunately, the Government has issued no bulletin 
showing just what lands are so classified or withdrawn from permit 
application, and such a bulletin is necessary for a proper operation of 

i the law. Specific royalties are set for each lease, and the award is made 
to the bidder offering the highest bonus. Boundaries of producing struc- 



40 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

tures are determined by the United States Geological Survey, and 
maps and files showing them are placed on file in the local land offices. 

(4) Placer lease. — Where a tract has been developed under certain 
specified conditions under the Placer Law, but no patent has been 
issued, the holding may be converted into a lease under this act. Where 
all the conditions requisite for patenting have been complied with, and 
the Government is so convinced, the owner will, of course, prefer to take 
a patent. 

An outline of the Act of February 25, 1920, is given in Fig. 2. 

The text is printed in full in Appendix A, together with the regula- 
tions for the operation of this act, and a digest of decisions and opinions 
in connection with its administration. 

STATE LANDS 

Lands owned by the States themselves are in many cases open for 
oil and gas development. The following are states, of interest to the 
oil and gas producer, in which the conditions of prospecting and de- 
velopment can be specifically stated. 

Ohio. — The Auditor of the State has the authority to lease ^' any 
unsold portions of Section 16 and Section 29, or other lands granted in 
lieu thereof, of the original surveyed townships for the support of 
schools and religion "^ upon such terms as may seem best. Further- 
more, by the laws of 1916, the mineral rights are reserved to the State 
on all public lands sold after that date. 

Louisiana. — The state lands are of considerable extent, and include 
lakes and river beds. Application for any tract should be made to the 
Governor of the State, who is authorized thereupon to call for further i 
bids up to an announced date, at which time award is made to the high- ^ 
est bidder. The award is in the form of a lease at not less than one- 1 
eighth royalty, or $200 a year for each gas well. 

Oklahoma. — There are several hundred thousand acres of school 
lands scattered throughout western Oklahoma. These are offered 
from time to time at public sale, the bidder offering the highest cash 
bonus being awarded a lease at one-eighth royalty. Unless a well is 
completed within a year, an annual rental of $1 per acre is required 
until such drilling is done. A lease runs for five years, and as long there- 
after as oil or gas may be produced thereon in paying quantities. 

All lands between mean high-water mark in streams or rivers 2 chains 

or over in width, are owned by the State, and may be leased by the 

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WYOMING 41 

Commissioners of the Land Office. The law gives the Commissioners 
the authority to hold sales, after due notice, awarding leases to the high- 
est bidders. Royalty is not less than one-eighth, and the bonus is 
competitive. A well must be drilled within one year. 

The State Board of Public Affairs is empowered to lease, under 
similar conditions, the lands of any penal or charitable institution 
belonging to the State. 

Nebraska. — Lands are offered for lease to the highest bidder at a 
one-eighth royalty on both oil and gas. Development must be started 
within one year. No person is allowed more than one section of 640 
acres, and no association more than 10,000 acres, by assignment or 
otherwise. The lease is for three years but may be renewed on the 
same terms as were provided in the original lease, unless changed by 
future legislation made to protect the interests of the State. Nebraska 
State leases suffer a deserved stigma, however, as the first leases were 
declared invalid by the State Courts, notwithstanding which the leg- 
islature refuses to reimburse the holders for the bonus they paid. 

South Dakota. — A prospecting permit is granted for one year. 
In case oil or gas is found, the permit is surrendered, and a five-year 
license taken out, allowing the removal of the oil or gas at a one-eighth 
royalty for oil and $100 per year for each gas well. A permit calls for 
payment of a fee of $100 for every 160 acres, and a license for an annual 
rental of $1.00 per acre with a minimum of $25; but such rental may be 
applied to the royalty of that license. Licenses may be renewed for 
five-year periods. 

Montana. — Lands belonging to the State of Montana may be 
leased for five-year periods, at $100 annual rental, and 15 per cent 
royalty on both oil and gas. Not more than 320 acres may be leased 
to one person or company. The lessee is required to drill a well to a 
depth of 500 feet in the first eighteen months and 1000 feet additional 
in each succeeding year, unless oil or gas are found in paying quanti- 
ties. In this case a new well is required each year, and it must go to 
a depth of 1000 feet unless stopped at commercial oil or gas at a shallower 
depth. Some earlier leases on more liberal terms are now extant. 

Wyoming. — In Wyoming both prospectors' and operators' licenses 
are issued. The former allows prospecting of a tract not more than 
640 acres in extent for one year, at an annual rental of not less than 
$100. It may be renewed, but at a rental of $200 per year. If oil or 
gas is discovered, the prospector's lease must be surrendered, and an 
operator's Hcense applied for. It must include not more than 640 



42 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

acres, at not less than one-eighth royalty, for five years, with renewal 
privileges beyond that time. An annual rental of not less than $100 is 
required, but it may apply on the royalty. 

Utah. — The state lands of Utah are leased in tracts not exceeding 
2560 acres at an annual rental of not less than 50 cents per acre, and for 
such royalty as the Board of Land Commissioners may deem fair and 
in the interest of the State. Rentals may be credited against royalties 
of the same year. Leases run for twenty years, at the end of which 
time they may be renewed, subject to such readjustment of terms and 
conditions as may be considered necessary in the interest of the State. 

Colorado. - — In Colorado, an application, accompanied by the proper 
fees, is made for a lease of State lands, and the application is accepted 
or rejected by the State Board of Land Commissioners. The lease is 
usually for five years, at one-eighth royalty, 10 cents per acre annual 
rental with a minimum of $50, and a drilling requirement that 2500 
feet be drilled each year, the first year commencing at the end of the 
first six months of tenure. The maximum limit is 2560 acres, but in 
any case only three-fourths of the amount applied for is actually granted, 
the remaining one-fourth being reserved by the State. A well drilled 
to success gives the lessee possession of the well and the 160-acre tract 
upon which it is located. If the lessee shall have drilled 10,000 feet 
in the aggregate during the first five-year period of the lease as granted, 
an extension of the lease for five years may be obtained. 

Washington. — The Commissioner of Public Lands is empowered to 
lease, for oil or gas, any land belonging to the State. A lease may not 
exceed 640 acres in extent. A rental of not less, than $25 per quarter 
section per year is required and, in addition thereto, a royalty of 10 per 
cent on oil and gas. Operations must start within two years and pro- 
ceed with diligence. The term of a lease is five years, with renewal 
privileges. Holders of agricultural leases have preferential rights to 
leases for oil and gas. 

New Mexico. — In New Mexico, leases of State lands are advertised 
and sold at auction. Leases are for ten years and as long thereafter as 
oil and gas are found in paying quantities. Royalty is not less than one- 
eighth and rental not less than 15 cents per acre, with a minimum of 
$100. Not more than 25,000 acres are to be included in one lease, and 
the drilling of a well will exempt the lessee from payment of rentals for 
the following year on 5000 acres. 

Texas. — All public school, university, asylum and other lands, in- 
cluding stream beds and the like, which belong to the State, and lands 



INDIAN LANDS 43 

upon which the State has reserved the mineral rights, are open to pros- 
pecting and development. Prospecting permits may be issued for two 
years upon not more than 2560 acres in each permit at an annual 
payment of 10 cents per acre. No limit is placed on the number of per- 
mits that may be held by one person or corporation, but if several per- 
mits of the maximum amount are held, they must not be less than 2 
miles apart. Operations must be commenced on each permit within 
one year. 

Upon the development of petroleum or natural gas, the prospector 
is entitled to a lease upon the full area of the permit. The term of the 
lease is ten years or less if desired by the applicant, with the option of 
renewals for like periods. The annual rental is $2 per acre, and a roy- 
alty of one-eighth of the gross production of petroleum is charged in 
addition to rental. A gas well is charged with a royalty of one-tenth 
of the value of the meter output of all gas disposed of off the premises. 
Permits and leases may be transferred. 

The holder of land obtained in fee from the State may lease it under 
any terms he may desire, so long as his lessee pays to the State 10 cents 
per acre per year in advance, and in case of production, a one-sixteenth 
royalty. 

Arizona. — State lands are open to leasing, upon application to the 
State Land Department. 

Illinois. — The State has no lands except those that are being used 
for park purposes, and on these no grants of any kind are made. 

Kansas and North Dakota. — These states do not provide for oil 
and gas leases on their own lands. 

Michigan. — Mineral rights, including oil and gas rights, are re- 
served when State lands are transferred to private owners. The State 
Land Commission has the right to lease the oil and gas rights owned 
by the State upon such terms as it deems just and equitable. 

INDIAN LAND SI 

Although there are Indian lands in most of the Western States, 
Oklahoma is as yet the only one in which they have proved to be of 
great importance to the oil producer. 

The Indians formerly held their land in common for the benefit of 
aU members of the tribe, but from time to time the Government has 

^ Oil and gas leasing regulations covering both allotted and tribal lands may be 
obtained from the Office of Indian Affairs, Department of the Interior. The reader 
is also referred to Rice and Lyons, " The Oil Operator in Oklahoma." 



44 OIL AND GAS RIGHTS ON FEDERAL AND STATE LANDS 

divided up the tribal estates among their members, or in other words, 
allotted the lands in severalty. At first the allotted lands were under 
restrictions against alienation, so that the Indians could not sell or lease 
them, except to Indians, without permission of the Secretary of the 
Interior; but by various acts these restrictions have, in many cases, 
been removed. In general, allotted lands of Indians having less than 
three-quarters Indian blood are free from restrictions. 

The leases which may be taken from Indian landowners are, there- 
fore, as follows: 

(1) Commercial lease. — This term refers to the ordinary lease as 
previously described. Commercial leases are taken on all Indian 
lands from which the restrictions have been removed. These include 
an ever-growing majority of lands. 

(2) Departmental lease. — Lands which are still under restrictions 
against alienability can be leased, but on a somewhat different form and 
with the approval of the Secretary of the Interior. The terms as to 
rental, being more severe than is customary in commercial regions at 
similar distances from wells, have the effect of making these leases less 
desirable, so that the commercial leases are taken up first and in some 
regions only the commercial leases will be taken. 

(3) Minor leases. — Leases from minors, or persons who have not 
reached the age of competency, must be executed by the guardian 
of the minor with the approval of the proper court. Such a lease may 
be a commercial or a departmental lease, as indicated above. 

(4) Lease on inherited lands. — A lease from a full-blooded Indian 
heir must also have the approval of the County Court having juris- 
diction in the settlement of the decedent's estate. 

Osage Reservation. — Special laws and regulations apply to the 
Osage Indians. In 1906, Congress directed that all lands belonging to 
the Osage Tribe should be allotted to the members of the tribe, but 
that the oil, gas, and other mineral rights should be reserved to the 
tribe as a whole for a period of twenty-five years from 1906. Leases 
could be made by the tribe through its tribal council, but only three 
were given up to May 31, 1917. One of these was very large and was 
sub-leased in fractions. 

Beginning with May 31, 1917, the Department of the Interior has 
held sales, at which one-hundred-and-sixty-acre tracts of Osage land 
are offered to the highest bidders. These auctions are held at the 
Osage Agency at Pawhuska, and the proceeds go to the tribe. 



OSAGE RESERVATION 45 

Leases are for five years and as long thereafter as oil or gas is found 
in paying quantity, except that originally this period could not extend 
beyond 1931, the date to which the title to the minerals was to remain 
in the Osage Tribe. In 1921, however, Congress extended the time to 
1946, and further provided that leases should run as long after 1946 
as oil or gas is found in paying quantities. 

A well must be drilled to the Mississippi lime in the first twelve 
months, unless oil or gas is encountered in paying quantities at a lesser 
depth, or unless the time is extended by the Secretary of the Interior. 
Such extensions were common during the depressed period in mid- 
1921. Royalty is one-fifth if the producing wells average 100 or more 
barrels of oil per day, and one-sixth if less than 100 barrels per day. 
The bonus is competitive. West of Range 8, a lessee may hold any 
number of acres he desires, but east of that line not more than 20,000 
acres. 

A geological survey of nearly all parts of the Osage has been pub- 
lished by the United States Geological Survey in pamphlet form, each 
number describing a small unit. Surveys of the remaining townships 
are in preparation. 



CHAPTER VI 

OIL AND GAS RIGHTS IN OTHER COUNTRIES OF NORTH 
AND SOUTH AMERICA! 

CANADA 

In those portions of the older provinces of Canada which have been 
settled longest, as in the oil fields of Ontario, the mineral rights belong 
to the private landowners. These portions, in general, comprise the 
zone along the southern border of Canada. In them, the privilege of 
exploring and of developing oil and gas pools may be obtained by means 
of a commercial lease of a type similar to that used in the United States. 

North of the belt of privately owned lands are the public lands. 
In the Eastern Provinces and in the Province of British Columbia, 
mineral rights on the public lands are disposed of under specific laws 
enacted by the various provincial governments. In the Provinces of 
Manitoba, Saskatchewan and Alberta, and in the Northwest and Yukon 
Territories, the Dominion Government retains control over the lands 
and minerals and imposes regulations for their disposal. 

In western and northern Canada there are also large quantities of 
railroad and Hudson Bay Company lands, some of which have been 
sold to individuals; and in some parts of these the mineral rights have 
been reserved. 

Canada pays a bounty of IJ cents per imperial gallon on all oil 
having a specific gravity of not less than 0.8235 at 60° F. (40° Be.) which 
is produced within her borders. 

New Brunswick. — The General Mining Act provides for the 
issuance of a license to prospect public lands, or private lands where 
mineral rights are reserved. The maximum area for each Ucense is 5 
square miles, but more than one license may be held. The initial cost is 
$20. 

This holding is succeeded by a license to develop or work a square 
mile, selected by the licensee from the area covered by his license to 
search. The cost of the Ucense to work is $50, and it is good for two 
years, with the privilege of extension to three years upon payment of 

1 See especially, " Petroleum Laws of All America," by J. W. Thompson. U. S. 
Bureau of Mines, Bulletin 206 (1921). 

46 



BRITISH COLUMBIA 47 

$25. Work must be commenced within this term and dihgently prose- 
cuted. 

At the expiration of the hcense to work, a lease may be taken. It is 
for a twenty-year period, subject to twenty-year renewals up to a 
total of eighty years. Royalty on licenses and leases is 5 per cent on 
both oil and gas. 

In New Brunswick it is further placed within the power of the 
Lieutenant Governor-in-Council to grant, for the purpose of stimulating 
development, to a corporation of sufficient ability, a special license to 
search, covering any specified area or areas. This is good for five 
years. Twenty thousand dollars must be expended within the first 
two years, not less than $20,000 for each year thereafter, and not less 
than $100,000 in the whole five years. Upon discovery of a well that 
can be operated at a profit of 6% or more, a lease may be given, to in- 
clude not more than 10,000 square miles. Its duration shall be not 
more than 99 years at a royalty of not less than 5%. 

Quebec. — A permit or " ordinary license " may be obtained to 
explore public lands for oil or gas. The maximum area is 1280 acres, 
and the term is one year, with the option of a one year renewal. Work 
must be done to the value of $1.00 per acre per year. 

When oil or gas has been discovered, a lease, or " long term license '^ 
is granted for a ten year period, at a rental of 25^ per acre per year. 
This long term license is renew^able in 10 year periods as long as oil or 
gas is produced. 

Ontario. — In Ontario, there are some public lands and some lands 
in which the mineral rights have been reserved to the Crown, especially 
in the newer parts of the province. Oil and gas rights may be obtained 
by means of a prospecting permit for an area not exceeding 640 acres, 
and for one year subject to renewal. This permit costs $100, and $2 
worth of work per acre must be performed in the Year's tenure. If a 
discovery is accomplished, the prospector is then entitled to a lease, 
for 10 years with renewal privileges, at a cost of $1 per acre in advance 
and requiring $2 worth of work per acre per year in the operation of 
producing the oil or gas. 

British Columbia. — This province also issues a prospecting license 
for not more than 640 acres, for one year. The initial cost is $100 and 
the permit can be renewed upon satisfactory evidence that work has 
been done. The discovery of oil is followed by the granting of a lease, 
good for five years and subject to the payment of an annual ground 
rental of 15^ an acre, and a royalty of 2J^ per barrel of oil. At the ex- 



48 OIL AND GAS RIGHTS IN OTHER COUNTRIES 

piration of this lease, the producer is entitled to purchase the land 
including the coal, petroleum and natural gas thereunder for $20 an 
acre or in case the surface rights have been sold, he may obtain for $15 
an acre such rights to coal, petroleum and natural gas as were not sold 
with the surface. 

Crown Lands in Western Provinces. — This includes the public lands 
in Manitoba, Saskatchewan, Alberta and Yukon Territory, the railway 
belt in the Province of British Columbia, and the 3| million acres of 
land in the Peace River district acquired by the Dominion Govern- 
ment from the Province of British Columbia. The Northwest Terri- 
tories will be considered separately. In these Crown Lands of the 
western provinces, the oil and gas rights are obtained by means of leases 
for a period of twenty-one years, subject to renewal for twenty-one 
years. The rental is 50 cents an acre for the first year and $1 an acre 
for each subsequent year. An oil royalty of not more than 5 per cent 
nor less than 2J per cent is charged for the first five years, from 5 per 
cent to 10 per cent the second five years, and 10 per cent thereafter. 
The maximum area of location is 1920 acres, but by assignment a person 
may acquire a greater area. Application for a lease must be made to 
the Agent of Dominion Lands for the district in which the land is situ- 
ated, or to a subagent. In any question of priority, however, the date 
of receipt of an application is the date on which it is received by the 
Agent. The lessee must have machinery for prospecting on the lease 
within a year, and must commence drilling in fifteen months. Drilling 
must be prosecuted with diligence, and at least $2000 must be expended 
on a lease in a year. The work may be done upon one lease of a group 
for the benefit of all the leases. 

The Dominion Forest Reserves, excepting such portions as have 
been proclaimed Dominion Parks, may be acquired under the same 
regulations, with 3840 acres as the maximum area of location, and with 
the provision that one-half of this shall be reserved for the Crown, 
while the other half is developed by the claimant. 

Crown Lands in Northwest Territories. — Following the discovery 
of oil at Fort Norman, special regulations were announced on February 
11, 1921, for Crown Lands in the Northwest Territories. 

A prospecting permit, good for a four-year period, must first be 
secured. The maximum area which may be obtained by application is 
2560 acres, and it may be acquired in as many as five separate blocks; 
the minimum area is 80 acres. More land than 2560 acres may be ac- | 
quired by assignment. Application must be filed in person with the 



SPANISH AMERICAN COUNTRIES 49 

mining recorder for the district, or with a sub-recorder; but priority of 
application is based upon the date of receipt of such appHcation in the 
office of the mining recorder. Rentals are 50 cents per acre for the 
first year, and $1 per acre for the second and third years; but the last 
two are not required if drilling obligations have been fulfilled. Drilling 
must be at least commenced within two years, and a depth of 500 feet 
in one or more wells must have been drilled by the end of the third year, 
or $5000 expended in driUing. By the end of the fourth year, drilhng 
must aggregate 2000 feet unless conclusive determinations can be made 
at shallower depths. 

The discovery of oil terminates the permit and the operator takes 
out a lease upon a square block, to be chosen by himself, comprising 
one-quarter of the area held in the permit. The remaining three- 
quarters is reserved to the Crown. The lease is for twenty-one years 
with the privilege of renewal for twenty-one years more. Rental is 
$1 per acre per year. Royalty on any lease is 5 per cent until April 1, 
1926, after which it will be 10 per cent. A royalty on gas may be speci- 
fied when the occasion arises. In order to use the surface for operations, 
it is necessary to lease as many acres as are necessary, at a yearly rental 
of $1 an acre. In order to assign either a permit or a lease, the con- 
sent of the Minister of the Interior is required. 

Any company holding oil and gas rights must be incorporated under 
the Companies Act of 1906, unless they obtained their rights before 
these regulations of 1921 were in force. Furthermore, " Citizens of 
another country, the laws, customs, or regulations of which deny similar 
or like privileges to citizens or corporations of the British Empire, shall 
not, by stock ownership, stock holding or stock control, own any in- 
terest in any permit or lease acquired under the provisions of these 
regulations."^ 

SPANISH AMERICAN COUNTRIES 

The fundamental principle that mineral rights belong to the govern- 
ment is strongly emphasized in the laws of Spanish- American countries. 
South of the Rio Grande, throughout both North and South America, 
the oil and gas rights do not belong to the owner of the soil to such an 
extent as in the United States; consequently, the acquisition of devel- 
opment privileges more often involves direct or indirect dealings with 
the government in power. 

^ Section 44 (c) of the Regulations for the Northwest Territories of Canada. 



50 OIL AND GAS RIGHTS IN OTHER COUNTRIES 

Mexico. — In 1884, under the regime of Diaz, the Mexican con- 
stitution nationalized the minerals of Mexico, but specifically excepted 
the hydrocarbons, petroleum among them. About the year 1900, 
Americans and others, acting on this basis, started to take leases from 
private owners at a 10 per cent royalty. This represented the normal 
method of obtaining oil and gas rights in Mexico. By the year 1917, 
most of the land in the oil region of the Tampico district was under 
lease. 

In 1917, the constitution of Carranza went further and nationalized 
all hydrocarbons, in Article 27. However, Article 14 stated that 
nothing in this constitution should be interpreted in a retroactive man- 
ner. This law makes a mining denouncement, or claim, the method of 
obtaining oil and gas rights, although so far the companies have felt 
that the confused state of affairs called for preliminary negotiations with 
the owners of the surface rights. 

A denouncement, or claim, is for not less than 4 hectares, and, in 
addition to taxes, requires an annual rental of 5 pesos per hectare and a 
5 per cent royalty. Drilling must be commenced within three years. 

It was understood that the Carranza constitution could not affect 
leases held prior to 1917, and the companies so held. On the other hand, 
the decrees of Carranza and the demands of the Mexican Government 
that the companies pay a royalty, in addition to the export taxes which 
they have always paid, have sought to make the provision in reality 
retroactive. The governments following the Carranza regime have 
said that there would be no attempt to make the law retroactive, but 
they have nevertheless continued to put pressure on the companies to 
pay royalty. The companies have refused to accede to this demand, 
and protests from the United States Government have had no material 
effect on the situation. Although the operators of the Tampico field 
do not hold a single acre under government concession, members of all 
Mexican political parties have attempted to justify their attitude by 
using our Public Land Leasing Act as an analogy. Among other 
examples cited were the Volstead Act and the Russian nationalization 
of Baku. 

To complicate matters further, there was evolved a federal zone, 
which included strips along the coast and on both sides of navigable 
rivers and their tributaries, so that any watercourse or possible water- 
course would be involved. This zone was given as a blanket concession 
to a single company, and whether that concession is still in operation or 
not, the zone has served to confuse many land titles. 



PANAMA 51 

In addition, other individuals have been allowed to denounce 
territory now held by developing companies, because the companies 
would not acknowledge the illegal claims of the Government by filing 
denouncement papers on their own property. 

The situation, however, was greatly improved by the quieter con- 
dition of the country, and the decrease of lawlessness following the 
demise of the Carranza regime. Under the later governments a better 
understanding between the operators and the Mexican nation is to be 
hoped for, and steady development toward better conditions is gener- 
ally expected. 

Guatemala. — Leases on petroleum can go only to citizens, and 
government permission is necessary for a transfer of these rights. 

Honduras. — There are no petroleum laws, and oil and gas rights 
are obtained only by special concession from the government. A 
blanket concession to prospect and develop is in force in Honduras until 
1944, according to a Congressional enactment of April 3, 1919. 

Costa Rica. — Petroleum claims may be denounced. The maxi- 
mum size is 2000 meters on a side, and operations must commence with- 
in two years. The government must be paid 5 per cent of the value of 
the oil at the well. The law of 1913 annulled the application of the 
former mining laws to petroleum, but recognized the legality of rights 
obtained under the previous laws. 

Large concessions have been given in the past. A Sinclair subsidi- 
ary holds the largest concession along the Caribbean coast. 

Cuba. — Petroleum rights in Cuba are Government property and 
are obtained by denouncement, in accordance with the old Spanish 
mining code. Conditions, so far as the legal phase is concerned, are 
good. 

British West Indies, British Honduras, Trinidad; Etc. — These, as 
British colonies, are practically closed to foreigners. Many American 
companies are deterred from entering this territory by the feeling that 
they would not be allowed to obtain a foothold, although no definite 
law to that effect is known. 

Panama. — Much of the leasing for petroleum has been from private 
owners. On the public lands the Executive grants prospecting permits 
of one year's duration and covering 25 hectares (one hectare = 2.471 
acres). Upon any discovery of oil which appears to Government ex- 
perts to be capable of producing at least 1000 liters of oil per day or 
10,000 liters of gas per day, a ten-year lease is given, and may be ex- 
tended an additional ten years. The lease itself may cover a tract 1000 



52 OIL AND GAS RIGHTS IN OTHER COUNTRIES 

meters long and 400 meters wide. The operator must pay to the 
Government 5 per cent of the gross product of the business. 

Salvador. — A law passed April 18, 1918, returned to the Govern- 
ment the possession of all minerals, including petroleum and natural 
gas, but this law recognized the legality of existing rights. 

A concession to explore and develop any unexploited land in Sal- 
vador was given in 1913 and confirmed in 1919. Exploration is per- 
mitted until December 31, 1929, and operators are granted the privilege 
of working for thirty years any oil deposits that may be discovered. 
The concession calls for a 10 per cent royalty. 

Argentina.^ — The State owns all petroleum. 

Some concessions have been given to foreign companies, but the 
success Argentina has had in developing the Comodoro Rivadavia field 
has led to a strong tendency toward operation by the Government 
itself. 

Bolivia. ^- Petroleum belongs to the Government, and public and 
unenclosed private lands may be prospected without a license; but a 
license is required on enclosed private lands. Concessions, giving 
further rights of possession, may be obtained from the Government on 
payment of a license fee of 4 bolivianos per hectare. 

The greater part of the prospective oil regions are now held under 
large concessions, with a few small holdings about some of the seepages. 

Brazil. — Petroleum rights on public lands belong to the Govern- 
ment, and on private lands to the owner. Permits to work may be 
obtained from private owners, and in case of discovery the deposit 
belongs equally to landowner and prospector. Public land may be 
prospected under a license from the Government, and in case of dis- 
covery a concession is granted for a period of fifty years at the most. 

There seem to be no restrictions on foreign individuals or corpora- 
tions. 

British Guiana. — None but British subjects can obtain concessions 
for the development of petroleum. 

Chile. — Mineral rights belong to the State, even under land of 
which the surface is privately owned. Anyone may prospect unculti- 
vated lands, but a license must be obtained. If a landowner refuses a 
license, it may be granted by the judge of the proper locality. 

^ For all South American countries, see, in addition to Bulletin 206, U. S. Bureau 
of Mines, J. W. Thompson, Petroleum Production in South America Avith Relation 
to Recent Petroleum Legislation: United States Bureau of Mines, Reports of In- 
vestigations, Serial No. 2250, May 1921. Also in California Oil World, May 26, 
1921, page 25. 



COLOMBIA 53 

Colombia.! — On December 30, 1919, a law was passed by the 
Colombian Congress to regulate the acquisition of petroleum rights and 
to settle differences of opinion in regard to the rights that the Govern- 
ment was claiming in the subsoil of private properties. 

By this law, the public lands of Colombia are thrown open for pros- 
pecting under a Government license, discovery to be rewarded by a 
lease for the development of the deposit, covering not more than 5000 
hectares nor less than 1000 hectares. The term of the lease is twenty 
years, with the possibihty of extension for ten years more under laws 
in force at the time. A royalty must be offered by the applicant. One 
individual or corporation cannot hold more than three claims in any 
one Department or District, whether obtained by direct application, 
or by assignment. 

Aliens and foreign corporations must comply with all the laws re- 
lating to alienship and naturalization, and agree to the requirements of 
this law as to taxes, rate of royalty, causes of forfeiture, etc. A difficult 
provision is that by which all machinery and equipment are forefeited 
to the Government without compensation, at the end of the term of 
holding. 

For administration purposes, and also for the levy of a develop- 
ment tax, the law divides the Republic into three zones, as follows : 

Zone 1 — Lands lying at a distance of 200 kilometers or less from 
the sea coast. 

Zone 2 — Lands lying 200 to 400 kilometers from the sea coast. 
Zone 3 — Lands lying more than 400 kilometers from the sea coast. 

Taxes are levied on production from public land leases at rates of 
10 per cent, 8 per cent and 6 per cent on zones 1, 2, and 3 respectively. 

Besides the public lands, the law also specifies three other groups of 
lands in Colombia. 

1. This group includes private properties and Government sales 
of pubHc lands, the titles of which were issued previous to October 28, 
1873. For a twenty-year period from the date of the law (December 
30, 1919), owners of these lands may avail themselves of their own rights 
to the petroleum deposits. If they have not taken advantage of fav- 
orable prospects at the end of that time, the Government will levy an 
annual tax of $5 per hectare until exploitation is undertaken. Taxes 
are 8 per cent, 6 per cent and 4 per cent on Zones 1, 2, and 3 respectively. 

^ H. de le EsperieUa, Oil Lands of Colombia, Magazine of the New York Petroleum 
Exchange, December 1921, page 16. 



54 OIL AND GAS RIGHTS IN OTHER COUNTRIES 

2. In the second group are those lands which were sold as unculti- 
vated Government lands after October 28, 1873. The owners of such 
lands were given preference rights on leases for a period of two years 
from the date of the present law, after which applications from anyone 
might be accepted. Production taxes are 10 per cent, 8 per cent and 6 
per cent on the three zones, and there are, in addition, annual charges 
of 10 cents per hectare in the first year, 20 cents in the second year, 50 
cents in the third year, and $1 in and after the fourth year. 

3. The third group includes those lands on which titles to " oil 
mines " were issued by the Government in 1912 and 1913 up to April 
1st. These can be developed at any time by the holders of the title, 
and the taxes are the same as in the second group. 

The law furthermore makes exceptions for the following regions: 

1. " From a point 18 kilometers to the east from Punta Arboletes, 
a straight line ending at Cape Tiburon; to east and west, two parallel 
lines which from the points mentioned above will go southward, follow- 
ing the same direction 60 kilometers from the base of the Gulf of Uraba ; 
to the south, a line drawn from east to west joining the two parallel lines 
mentioned above." 

2. Government lands " from a point halfway between Cocalito and 
Punta Ardita to the boundary line with Ecuador, a zone of 20 kilometers 
in width and, besides, to the territorial sea zone corresponding thereto." 

The first exception is that within these regions there shall not be any 
preference rights by reason of discoveries. In the second place, the 
minimum tax for exploitation shall be 20 per cent of the gross products. 
Thirdly, no one person can lease more than 5000 hectares; except in 
cases where the agreement may include financial operations which will 
result in acquisition for the pubHc exchequer of a loan of not less than 
$20,000,000, in which case the lease may cover 100,000 hectares. 

Ecuador.^ — The right to develop the pubHc lands of Ecuador is 
obtained by means of a lease of twenty years' duration, with the option 
of ten-year renewals. The maximum area which may be held under 
lease in any one canton is 5000 hectares, and the minimum is 500 
hectares. In a province, the aggregate maximum is 15,000 hectares. 
The lessee must pay a royalty or tax of from 5 per cent to 12 per cent, 
depending on the location, this tax to be increased every ten years but 
not in sufficient amount to exceed the 12 per cent maximum. Rental is 

^ Translation in Oil & Gas Journal, December 23, 1921, page 70. 



VENEZUELA 55 

levied at the rate of 20 cents per hectare for the first year, 40 cents for 
the second year, 80 cents for the third, and 1 sucre for the fourth and 
each remaining year. 

If the lessee is a foreign company, an attorney or manager must be 
appointed. The person selected must possess proper qualifications and 
sufficient power to act in conformity with Ecuadorian laws. 

Exploitation must be started within four years, and, once started, 
must not be interrupted for as much as three months except because of 
unavoidable delays. 

If a lease is terminated as a penalty, its plant, machinery, etc., be- 
come the property of the State without compensation. 

Owners of " oil mines," with titles conferred under the Code of 
Mines and former laws, may enjoy their holdings for a period of fifty 
years from the date of the law (October 8, 1921), provided they have 
fulfilled all their obligations. Rental in this case is 15 sucres for every 
pertenencia or mining claim, and royalty is the same as for a lease. 

Paraguay. — The State owns all minerals except building materials, 
and individuals or corporations may obtain rights through Govern- 
ment concession. A tax of 20 cents Argentine gold per hectare is 
required, as well as 5 per cent of the gross products. 

Peru. — Large concessions have been granted, and there has been 
production on some of them since the late eighties. Exploration and 
development have been generally encouraged, but details of procedure 
await the passage of a new law. 

Uruguay. — There is no law relating to petroleum. The Executive, 
however, has been authorized to appoint a committee to revise the 
mining code. 

Venezuela. — Venezuela controls all mineral rights, and any contract 
for the exploration and development of petroleum must be made with 
the Government, under the law of June 19, 1920. 

The first step on public lands is an exploration permit leading to 
discovery. The permit covers 10,000 hectares, and no more than six 
permits can be granted to one individual or corporation. The duration 
is two years. For exploration on private lands, the Government can 
give permits for one year from the date of the passage of the law, pro- 
vided the owners themselves have not already undertaken exploration 
for mineral products. 

A lease, or exploitation contract, is granted upon the discovery of 
oil or gas, the area of each plot to be 200 hectares. The discoverer 
receives the plot upon which he drilled and each alternate plot of the 



56 OIL AND GAS RIGHTS IN OTHER COUNTRIES 

10,000-hectare tract. The remaining alternate plots revert to the 
Government. One person or company may hold as many as 40,000 
hectares of land, under exploitation contracts obtained by original 
development and by assignment. The duration of the contract is thirty 
years. 

One month after the lease is granted, the operator must pay to the 
Government 1000 bolivars, and each year he must pay 1400 bohvars as 
a surface tax. A royalty of 15 per cent is also required. The Gov- 
ernment plots may be leased at auction, on the basis of a competitive 
royalty, up to 25 per cent. 

Both permits and exploitation contracts may be held by aliens, and 
no restrictions are placed on foreign companies other then the accept- 
ance of the Venezuelan laws. 



CHAPTER VII 
TRADE IN LEASES AND ROYALTIES 

Oil companies are constantly seeking leases, in order to secure 
locations for the drilling that must be done to make up for the natural 
decline of their wells. This fact, together with the fluctuations of the 
price of these leases resulting from new successes or failures in the 
vicinity, leads to a great deal of independent leasing for the purpose of 
suppljdng this demand and, if possible, of anticipating it. Certain 
terms for such leases become customary in each field, and are modified 
by the various state laws and by the past experience of both farmers and 
operators in that region. 

Under these conditions, land is leased for little or no bonus in the 
early days of a leasing campaign. This bonus is increased as the de- 
mand for acreage exceeds the supply in any locality. 

In most districts, some of the leasing is done by those who are merely 
holding their leases to see if the region may not later become more 
promising because of successful drilling by others. Eventually, some- 
one tries to get a solid, or nearly solid block, of sufficient size and so 
located as to justify a well. Frequently a larger block is obtained, and 
enough of the acreage sold off to pay for a part or the whole of the 
drilling. In some cases there is a profit on such ventures even though 
the hole is a failure. 

This activity in the selling and re-selling of the leases becomes more 
active as the drilhng progresses, and the advance so produced fre- 
quently causes the taking of profits on a part of the holdings. Prices 
of leases, of course, vary with the demand, which is dependent on the 
geological (real or supposed) conditions in any area, the distance from a 
driUing well, closeness to production, publicity, vogue, salesmanship, etc. 

The landowner, of course, receives only the original bonus paid 
when his land is leased; this usually varies from 10 cents to as much 
as $5 prior to definite announcement of a well but may be higher. If 
he refuses to lease he may prevent the drilhng of a well; but if develop- 
ment moves his way, he can sometimes profit by waiting and leasing 
later at a larger bonus than his neighbors. On the other hand, if he 
postpones leasing too long, the interest in his locality may be impaired 

57 



68 TRADE IN LEASES AND ROYALTIES 

by dry holes, so that development moves in another direction and he 
does not receive even the smaller bonus paid his neighbors. 

In general, it may be said that it is to the interest of the landowner 
to encourage development, if by the terms of his lease he retains a 
royalty on any oil production. The sooner he gets a test well put 
down on or near his property, the greater the chances for early profits 
on his part. Thus, by leasing for a small bonus and a standard rental, 
he makes it easier for the lessee to handle his land in trade with one 
company or another, and the companies can afford to gather the neces- 
sary block for a test. In case of production, his royalty is worth many 
times more than any bonus he could demand for leasing his land. 

As typical development in the field progresses, certain individuals 
usually buy up the farmers' royalty in whole or in part. It is a usual 
procedure for the farmer to sell one-half of his one-eighth royalty, thus 
assuring himself a good profit and keeping the other half to await the 
outcome of drilling. 

The majority of buyers of royalties are individuals who wish an 
actual interest in producing properties without the responsibility of 
operating. They are often officials of companies operating in the 
district, or others closely in touch with the field and with the larger 
companies' operations. A royalty interest is obviously of more value 
when a lease is operated by an efficient company than when it is held by 
a less diUgent or weaker operator. Most companies find no fault with 
the buying of such royalties by their employees and in some cases may 
even encourage it. They do not, however, allow employees to hold 
leases in a field where the company is operating. In the first instance, 
the royalty holding cannot prejudice the company's interest in any way, 
and inasmuch as records of neighboring properties are thus made avail- 
able, the company actually profits thereby. On the contrary, the hold- 
ing, by an employee, of leases near a company's operation may be very 
prejudicial to the company's interest, and this is rarely allowed except 
where officials are playing their own interests against those of the stock- 
holders. 

In company operations where all details are directly under the eye 
of a responsible executive, certain employees may be allowed to acquire 
acreage, provided all leases are first submitted to the company. The 
practice can only be justified by the utmost frankness between active 
parties at all stages. There are certain ambitious, aggressive employees 
who are too valuable to lose, and whom a company cannot hold except 
by permitting them to make extra money in lieu of additional salary. 



TRADE IN LEASES AND ROYALTIES 59 

Furthermore, the holding of leases keeps employees in close touch with 
the field and stimulates their interest, which indirectly is also to the 
company's interest. It is always a dangerous procedure, however, as 
the company's interest may later conflict with that of its employees, 
and, in case the land becomes valuable, there often arises a question as 
to why the company did not take it in the first place. 

The general speculation in leases and royalties, which has developed 
around the legitimate business of oil-field operation, has been highly 
stimulated in recent years, and has brought into play a parasitic type of 
trader who is usually called a " lease grafter," although this term is 
sometimes improperly and loosely applied to all leasers. Narrowly 
speaking, a " lease grafter " is one who resorts to deceit in his operations. 
He was particularly active in Texas and Louisiana during 1919 and 
1920, when so much outside money was being put into wildcat operations 
by persons and companies desiring to avoid paying large Federal taxes. 
These persons were obviously not good judges of values, and they bought 
indiscriminately, often through unscrupulous " lease grafters." 

A broker or speculator owning leases in a desirable district may turn 
in all or part of each acreage for any one of several kinds of considera- 
tions, the most common being: 

1. All or part cash. 

2. An additional royalty, payable by the operating company, with 
the condition that a well be drilled. 

3. A " working interest " in the property. The seller then becomes 
a partner, paying his share of the expense of development out of oil 
produced. 

4. An added royalty on the first well drilled and a working interest 
in any additional wells. Such working interest is commonly one-eighth. 

An additional royalty is obviously more valuable than a working 
interest, but the granting of it is very dangerous to the operating com- 
pany. As it must be added to the original royalty paid the landowner, 
the royalty owners may often make more out of the lease than the 
operating company. It is only justified where the lease in question is 
in the center of a producing area, where the production is assured, and 
its size and character readily predicted. Where the outstanding royalty 
is high, it will become a burden on the lease after wells have declined to 
a small daily production, at which time it will result in a premature aban- 
donment of the lease unless a readjustment is made. A working in- 
terest, on the other hand, bears its own proportional share of operating 
expenses. 



4 



CHAPTER VIII 

MODES OF INDIRECT DEVELOPMENT 

There are a number of ways in which an investor or a company can 
participate in the profits of the development of an oil field, without 
directly taking leases and drilling them or buying producing properties. 
The main methods can be described as follows: 

(1) ^ Stock Purchase . — The individual may select a company in 
which to buy stock, thus becoming a partner in the ownership of oil 
properties and a participator in the new ventures the company under- 
takes. The principal advantage is the lessened risk incident to having 
one's money spread over more properties and ventures. Secondly, 
there is the advantage of thus obtaining the services of a highly efficient 
staff if the selection is well made. There is also more continuity in 
good company operations, so that such an investment can usually be 
carried for considerable periods of time without attention or worry. 

The decisive feature in investigating a company stock is the ratio 
of its market value to the value of the properties, plus its " going con- 
cern " value. The danger lies in the excessive stock that may have 
been issued for properties already condemned by unsuccessful drilling, 
or promotion in excess of its proper reward. Legitimate allowances for 
promotion or other elements of ''going value" should, of course, be 
expected. 

(2) Buying Royalties. — It is a frequent procedure for the landowner 
to sell the whole, or more frequently a half, of his royalty. This may 
be sold previous to development, while drilling is in progress and only 
partly completed, or as a royalty on a producing property. For those 
who have sufficient ability and data to judge properly the promise of 
production and probability of development, the purchase of royalties 
offers an excellent investment. On the other hand, the prices obtained 
by promoters for small fractional units of royalties are usually unduly 
inflated. 

In general, royalties on fully developed producing properties sell too 
high, as do those on wells of a spectacular sort, since these overstunulate 
the market and have, furthermore, a more rapid decline. The royalty 
buyer should always carefully consider the decline curve. 

60 



DRY HOLE CONTRIBUTIONS 61 

The value of a royalty interest in an undrilled lease is speculative, 
and the price paid will vary with the demand for such royalties in any 
particular district and with the confidence the owners have in the 
promise of production. The price is governed by the following factors: 

(a) Type and reputation of the lessee, especially whether a respon- 
sible operating company or an individual speculator, not in a position 
to drill reliably, if at all. 

(6) Prospects of well-guided drilling in the vicinity in the not-too- 
distant future. 

(c) Geological evidence of oil or gas probabilities of the tract. 

(d) Character of the nearest producing wells, as to life, productivity 
and grade of oil. 

The price paid per barrel of royalty oil in a producing lease is, of 
course, higher than the barrel price for the working interest in the 
lease, as the royalty oil is free from any charges of operating expense or 
future drilling. Its appraisal is easier and more reliable, yet it is a 
highly technical matter. 

(3) Buying Offset Leases to Drilling Wells. — This is a common 
practice on the part of large companies, as well as individuals. It is a_ 
highly speculative venture, but it is considered good practice at the 
prices which can, not infrequently, be obtained, if the buyer restricts 
such purchases to properties where (a) the geological evidence is 
favorable; (b) the_ contractor drilling the well is thoroughly reliable; 
and (c) the depth planned is sufficient to test the principal sands. 
The price must be scrutinized as closely in this type of investment as 
in others. 

(4) Dry Hole Contributions. — Where several companies are rep- 
resented by leases in a certain district, possibly with none holding a 
solid block, one of these companies may decide to drill, provided certain 
others will contribute a portion of the cost of a well, either as a donation 
or, more frequently, in case the well fails to become a commercial pro- 
ducer. In the latter case, the contributions are called " dry hole con- 
tributions," and the well is usually so located as to make the best test 
of the leases of the parties so contributing. This contribution may be 
in cash, or may consist in the donation or loaning of material, such as fuel 
(gas), casing, rigs, etc. In many cases, such a test will furnish the 
basis on which the various companies interested will decide whether or 
not to surrender their leases, or, in case of success, to drill them. A 
not infrequent blunder is to move the well from the best location to some 



62 MODES OF INDIRECT DEVELOPMENT 

other point, in order to draw out more or larger contributions of this 
sort. 

(5) Well-share Purchases. — A lease or group of leases is sometimes 
divided up into small fractional parts. Direct assignment is then 
made to investors, with an agreement to spend the money so paid in 
drilling a well on a certain location or locations. In case of success, it 
is further agreed that, after operating expenses are paid, all lessees of 
individual lots shall participate equally in the profits of the well, and 
in succeeding wells. 

Theoretically, by buying such lots in a number of such communal 
leases, one could spread his risk over a great number of wells. Actually 
however, the value of this form of participation depends largely upon 
the character and experience of the persons operating the lease, and in 
this type of enterprise these are generally poor. The interest of the 
enterpriser usually becomes very perfunctory after selling the leases, 
which have been his main interest, and there is too generally a lack of 
diligent effort and little or no continuity of program thereafter. 

The success of an oil operation depends upon so many factors be- 
sides putting down the first hole in the ground that the procedure men- 
tioned above is not recommended to the investor. 

In conclusion it may be stated that investors, especially small 
investors, should limit themselves to stock purchases, unless they 
have far more than the usual amount of ability and information, or are 
associated with one who has. On the other hand, an individual investor 
with ample capital can far more profitably act individually or with a 
small syndicate, if the capital is sufficient to take up the risks involved 
by an adequate number of ventures pooled ; and if such an investor has 
sufficient executive ability to select a buyer with the necessary training, 
experience, and honesty, he has already available most of the needed 
data. 



CHAPTER IX 
SIZE AND SCOPE OF OIL COMPANIES 

Concentration. — The relative economy and efficiency of large and 
small producing companies is a matter of great interest and importance. 
The following theoretical considerations, as well as actual practice, all 
point to the overwhelming advantage of large units of capital and 
management. 

The advantages of the large company are as follows : 

(1) By operating in more than one district, the risk is spread and 
thereby reduced, as compared with that of a small company operating 
in but one field. 

(2) The company has access to a much larger percentage of well 
records and information concerning the subsurface of the vicinity, as 
well as general geological data. 

(3) More efficient and more highly specialized men may be employed. 

(4) The number of offset wells to be drilled is considerably reduced, 
because larger leases are controlled. 

(5) A larger number of wells can be connected up and pumped by 
one power. 

(6) Economy in labor is effected by having one pumper tend several 
neighboring powers. 

(7) There is more continuous utilization of the plant and equip- 
ment, such as pulling machines. 

(8) Time and teaming are saved by maintaining well-distributed 
and well-stocked storehouses. 

(9) A gasoline extraction plant can be installed, because of the 
company's control of the necessary number of neighboring wells. 

(10) Pressure may be conserved and water or air flushing can be more 
frequently employed when the whole pool is owned by one company, 
or by but a few companies whose managers can easily reach an agree- 
ment. It is most difficult to reach such an agreement where there are 
many small lease holders. 

(11) Important experiments can be tried, such as testing the relative 
merits of competing methods of production and materials. 

63 



64 SIZE AND SCOPE OF OIL COMPANIES 

(12) There is greater uniformity in the procedure of completing 
wells, so as to take care of local water conditions. 

(13) More compact areas can be surveyed more economically. 

(14) By holding several contiguous leases, instead of a few scattered 
ones, a large company may '^ feel out," from established production, 
location by location, relatively unhampered by property lines. 

(15) A company that holds several contiguous leases is far less 
frequently forced, by the terms of the lease, to drill before needed in- 
formation is at hand. 

(16) The logs in a large company, if well managed, are more uni- 
formly recorded and are always available; whereas, among many 
small companies there are invariably some who keep very poor logs, or 
keep them secret, and there may be some who even falsify their records. 

(17) Supplies are better in quality and lower in price when they are 
purchased in large lots. 

(18) A large company can economize by drilling its own wells, in- 
stead of letting them out to contractors. If, because of the difficulty of 
securing a competent superintendent of drilling, the company prefers 
to contract, cheaper rates can be obtained by a large company because 
there are many wells close together in one contract, giving the con- 
tractor continuous employment and as a consequence permitting lower 
bids. 

(19) There is less danger of premature flooding by water from im- 
proper casing or plugging; also less waste of gas by small, irresponsible 
or incompetent neighbors. 

Integration. — The foregoing considerations apply to the greater 
efficiency of concentrated or large producing companies. The follow- 
ing considerations indicate the higher efficiency which results from 
the integration of the industry, that is, the bringing under one manage- 
ment of the various successive steps in the oil and gas industry, such as 
production, transportation, refining and distribution. 

(1) With integration it is possible to store oil in relatively few, large, 
central steel tanks; otherwise the oil would be stored in numerous, small, 
and more probably leaky tanks, and would deteriorate more rapidly. 

(2) Gasoline extraction plants, installed for handling gas from wells, 
can also recover gasoline from the vapors of the pipe-line company's 
storage tanks. 

(3) By controlling, to a certain degree, the rate at which wells 
are drilled, the danger of overproduction is reduced; at the same time. 



INTEGRATION OF OIL COMPANIES 65 

the amount of production is better adjusted to the needs of the re- 
finery. 

(4) The oil and gas business should be in the hands of the same com- 
pany, as otherwise the one-sided eagerness of the oil producer may 
lead him not only to waste vast quantities of gas, but also to render the 
search for gas more difficult and expensive on the part of the gas com- 
pany. 

(5) Pipe lines and laterals can be planned in a more systematic and 
far-sighted way, and will less frequently be left without supplying 
leases. 

(6) In many cases, water for pumping and drilling can be more 
cheaply supplied from the provisions already existing for the needs of 
the pipe line. 

(7) The guarantee of a regular production makes for greater economy 
and efficiency in the refinery, as well as in the marketing of the oil 

Comparative Efficiency of Oil Companies. 

The relative advantage of investment in either of two companies, 
one a large, sufficiently capitalized and well-integrated company, and 
the other a small company of limited scope and field of operations, will 
depend in large part upon the proper balancing of the effect of the 
following factors : 

(1) Does the large overhead organization of the one company so 
slow down its operations that it cannot compete with its more active, 
aggressive competitors? 

(2) Are the officials of the large company so occupied with their 
routine work or personal affairs as to prevent the company's receiving 
their best interest and enthusiasm? 

(3) Do factional troubles among different groups in the larger 
company seriously affect its efficiency? 

(4) Is there good cooperation between various department heads, 
enabling the company to operate successfully in several fields? 

(5) Do so many heads have to pass on important decisions as to 
seriously hamper active competition for properties? 

(6) How much working capital, as opposed to fixed capital, has 
each company? 

(7) Does the greater scope in operation of the large company reduce 
its risk of failures sufficiently to compensate for its greater cumber- 
someness? 



66 SIZE AND SCOPE OF OIL COMPANIES 

(8) Does the ability to command the services of high-grade and 
high-salaried men, to handle the large-sized operations of the big 
company, compensate for the greater personal interest of the actual 
owners, who function as executives in the smaller company? 

It is true that small companies frequently grow much faster than 
large ones, for in no other industry do skill and foresight give such large 
and quick returns. A large company may develop an important new 
field without much change in its general condition. However, com- 
panies with small capital and occasional extraordinary earnings are 
obliged to pay a disproportionate share of such earnings in Federal 
taxes. A high degree of executive ability and foresight on the part of 
the management of any company, large or small, will compensate for 
many disadvantages in other directions. 

A review of the independent oil companies of the country shows 
only about half a dozen that are strongly equipped with production, 
pipe lines and tank cars, gas-gasoline plants and marketing facilities. 
In times of financial stress or of wide oscillation in the price of crude 
oil and its products, such companies are in the best position to weather 
the storm; while the less well-balanced oil companies are the ones who 
usually fail and are absorbed by their stronger competitors. 

The methods and policies followed in managing a large, well-in- 
tegrated company differ from those used in the case of a small produc- 
ing company. In certain notable instances, executives who have 
successfully managed such large properties, and have later resigned to 
engage in their own operations on a smaller scale, have been unsuccessful 
through failure to adapt their methods and policies to the problem in 
hand. 

Syndicate Operations. — The enterprise conducted by an individ- 
ual, or one of its modifications, such as the partnership, syndicate and 
trusteeship, is a convenient method during the search for and pre- 
liminary drilling of properties, before operations have narrowed down 
to certain districts or any one field. It has the advantage of flexibility 
of movement, no corporation red-tape being involved in buying or sell- 
ing leases or physical property, and it avoids corporation taxes and re- 
ports which are heavy in certain states. 

The syndicate, or partnership, has the disadvantage of unlimited 
liability upon the part of its members, and the obstructions which can 
be put upon its routine management by any individual member, in case 
he should so desire. The trusteeship avoids the last disadvantage. 



SYNDICATE OPERATIONS 67 

but is not practicable except in cases where mutual confidence is at a 
higher point than usual. 

After the prospecting period has been passed, and the period of devel- 
opment of specific properties begins, it is usually desirable to incorporate 
for the purpose of taking over the valuable portion of the holdings of 
such a syndicate. Such incorporation may make possible the reaUza- 
tion of some of the profit earned by the appreciation of the property, 
but it may also be used to raise developmental capital with the advan- 
tage of having the capital so raised share in the risks. 

Such a reorganization also makes it possible to charge off, as individ- 
ual losses, the cost of surrendered properties and leases, dry holes, etc., 
for which money has been spent previous to the time of incorporation. 

Company and Department Relationships. — Accompany restrict- 
ing its_operatipns to producing oil is often dependent upon arbitrarily 
low prices paid by pipe lines or refineries for its crude oil. This is 
particularly true when there is little competition for the oil. Thus, 
the Magnolia Petroleum Company was the only important purchaser 
of oil in the early days of the Healdton pool. Until other pipe lines 
and the railroad were completed, the price of Healdton oil was kept 
below its real value as compared with other crudes. Elk Basin oil 
does not yet command a price commensurate with its quality. 

Thus, an independent producing company is dependent upon the 
price which the larger pipe lines, in their stronger bargaining position, 
offer to pay for the oil. Such a producing company is in a weak strategic 
position during periods of overproduction, such as that which occurred 
at Mexia in November 1921. Here the price varied from 75 cents to 
$2.25 in nearby counties, for oil not greatly different. 

The logical step for such a company, when it is large, is to build a 
pipe line to a nearby independent refinery, or at least to a railroad 
loading rack where shipments can be made to some refinery competing 
with that affiliated with the pipe line which would otherwise take its 
oil. Such a pipe line may pay expenses by carrying the oil of neighbor- 
ing producers, but such receipts must be looked upon as supplementary. 
An essential feature is that the company must have an assured ade- 
quate supply, either its own or one secured, by a firm contract, from 
properties with a promising future. 

The relief offered by a pipe line to a railway, or to a refinery which 
will use its full power to get the oil as cheaply as possible, is far less 
than that made available when a refinery is owned by the producing 
company. This is, of course, most evident where the oil is kept at a 



68 SIZE AND SCOPE OF OIL COMPANIES 

disproportionately low figure because of some feature of inferiority which 
is exaggerated, or where the oil is of extra good quality and is yet allowed 
only the regional price. As a general rule, therefore, large producers 
eventually become refiners, or enter a merger that contains one or more 
refineries. 

It is very seldom that a wholly independent pipe line arises merely 
as a pipe-line company. The nearest approach to this condition is 
realized when several operators in a pool jointly subscribe to a pipe line 
to give themselves relief. Such a pipe line, however, is clearly an 
appendage of the producing companies, even though the ownership is 
divided. 

On the other hand, the independent refinery is normally obHged to 
pay a premium over the offering of the large pipe lines of the district, 
partly because the producer feels less assured of a persisting market, 
Tbut mainly because the producer is in a stronger bargaining position. 
Since the independent refiner already suffers from operating a smaller 
unit, this premium is a direct loss that is seriously felt. It is not sur- 
prising, therefore, that he strives to avoid it by buying producing prop- 
erties, as in this case he is under no hardship and can buy to good 
advantage in an open market. 

The transportation from refinery to marketing point requires a large 
and expensive equipment of tank cars and tank wagons. This busi- 
ness, from its large capital demands and necessity of assured market for 
refiners, has fallen mainly into the hands of the refiners rather than the 
marketers. There are a few tank car companies, but they are" nearly 
all subsidiaries to a refinery. 

There are many small independent marketing agencies; but the 
ordinary advantage of integ^-ation in eliminating the selling cost be- 
tween refiners and marketers is so great that, except where there is a 
countervailing advantage in their separate existence, marketers are 
being absorbed by refining companies. There is an equally evident 
and rapid expansion in the number of marketing stations erected by the 
refiners, because the automobile, one of the principal consumers, does 
not require delivery but merely a marketing station on a much traveled 
road. 

The foregoing considerations make it desirable for a company, which 
expects to operate continuously and at a maximmn profit, to have a 
well-integrated corporation composed of all four elements — produc- 
tion, transportation, refining and marketing. 

Upon the bringing in of large amounts of flush production, with 



SYNDICATE OPERATIONS 69 

correspondingly cheap crude oil, in any district where the oil has a 
good gasoline content, there spring up small independent topping or 
skimming plants, designed to recover the gasoline content, and sell the 
balance as fuel oil. This sometimes gluts the nearby markets with 
fuel oil, which becomes hard to move and fills storage space that should 
be kept for cheap crude oil. Since this is a distinct economic loss, and 
the depletion usually exceeds expectation, the life of these plants at full 
capacity is ordinarily short. 

In periods of rising prices of crude oil in recent years, the large, 
well-equipped refineries have kept the price of gasoline advancing at 
a lower rate, making much of their profits from lubricants. This puts 
pressure on the small skimming plants, which were not equipped to manu- 
facture anything but gasoline and fuel oil, and led to many abandon- 
ments or reduced runs during high crude prices, with active operation 
during low crude prices. In view of the wastefulness of such skimming 
operations, the net result of these conditions is an improvement in 
methods. 

In 1921, an anomalous condition was brought about in the Heald- 
ton crude oil market. A flood of Mexican crude filled the Gulf Coast 
refineries, and improved refinery methods were making it more and more 
valuable for refinery purposes. However, owning to the cost of pro- 
duction, taxation and transportation, Mexican crude could not be 
delivered to Gulf Coast ports for less than $1.10. Meanwhile, the 
price for Healdton crude dropped to 60 cents, although it was a much 
superior oil. This evidently resulted from the fact that most of the 
Healdton was refined at the Gulf Coast, and it was expected that the 
readily accessible cheap oil of the Mexican field would be exhausted in 
a few months, while Healdton was a reserve which would still be avail- 
able after Mexican oil had been exhausted. The pipe-line companies 
had extensive investments in Mexico, which had to be liquidated during 
the presumably short life of that field. 

The foregoing analysis shows the reason why a well-integrated 
company, producing, transporting and refining Healdton oil would be 
making its best profits during such a period, in which the price of 
Healdton oil in the ground had fallen in much greater proportion than 
the selling price of refined products. 

Such a company as the one described can well afford to build tankage 
and store large quantities of cheap oil, wherever it appears, for future 
refining prices. Several of the large Mid-Continent companies owe 
their first big start in those fields to their large purchases of cheap 



70 SIZE AND SCOPE OF OIL COMPANIES 

Gushing crude in 1915-1916. Excellent profits were made by tanking 
Healdton and Eldorado crude, and are now being made in a similar 
way at Mexia. 

The six or seven strongest oil companies operating in the Mid-Con- 
tinent fields have become well-integrated companies through the 
process described, and the process continues. 



CHAPTER X 

FINANCING OF OIL COMPANIES 

An oil company may be formed for any one of the following purposes, 
or a combination of several: 

1. To take over syndicate properties, or purchase a producing oil 
property or group of such properties, stock, notes or bonds being sold 
for the purpose. 

2. To finance the bringing together of integral units of a complete 
oil-field operation, such as production, pipe lines, refineries, tank cars, 
etc., into one holding company. 

3. To aid in the division of interest of a syndicate which has ac- 
quired production as a partnership. 

4. To provide additional capital, the necessity for which may be 
brought about by the need of drilling numerous offset wells, or the 
temporary necessity of unusual expenditures over and above the usual 
working capital. 

5. To accomplish the sale of a part of a property to persons who 
do not care to manage it themselves. 

The following are the most common forms of obHgations issued; 

Notes. 

Bonds. 

Preferred stock. 

Common stock of stated or no par value. 

Trust certificates. 

Royalty and acreage units. 

There are three ends to be gained by such incorporation: 

1. Liability of individual stockholders is limited. 

2. Property is put under certain obligations, so that it may be 
divided into small salable units in marketable forms, readily accessible 
to the public, for raising additional capital, while the original owners 
need not relinquish control. 

3. The individuals who have brought the properties together^ or 

71 



72 FINANCING OF OIL COMPANIES 

the underwriters, are enabled to take their share of the future profits 
immediately, without waiting for deferred earnings. 

In general, enough stock is issued to satisfy three fundamental 
requirements : 

1. To pay for the properties included in the company. This may 
be preferred stock with a guaranteed interest from earnings, which 
may or may not be retired from the same source. It frequently carries 
with it a bonus of common stock. On the other hand, common stock 
alone, or preferred and common may go for the property and preferred 
for the new money contributed. 

2. To pay the promoters and underwriters profits and fees. This 
is usually common stock and varies in amount with the type of service 
rendered and the marketability of the stock without this service. That 
is to say, the promoters and underwriters frequently take all they can, 
the sole limit being that the company must not be so heavily capitalized 
that reasonable earnings (present or future) cannot be expected to pay 
fair returns to purchasers of said stock. This promoters' share is 
usually proportionately less when the stock is taken by a small group and 
not offered to the public, and proportionately more where advertising 
or extensive soliciting is contemplated. 

3. To leave enough stock in the treasury for later issues, to pay for 
additional properties which may be acquired later. This should be a 
fairly large block, as emergencies, which necessitate large amounts of 
additional capital, frequently arise in the oil business. Such emer- 
gencies include drilling offset wells while the field is flush, building 
tankage for storing oil to await a market or better prices, providing tank 
cars and field pipe lines, and purchasing offset properties for consoHda- 
tion and more efficient operations. 

The need for new capital is often met by giving, as a dividend, 
warrants which permit the purchase of new stock at a figure more or 
less below the market price, so as to ensure the raising of the money. 
The difference constitutes an attraction and a feasible distribution of 
value to stockholders without any drain on the treasury. 

Instead of new stock in the old company, this offering may be stock 
in a subsidiary or sister company. In cases where there has been a 
sudden accession of large profits in one year, this device may also serve 
to spread out the profits, so as to avoid the concentration of the profits 
in one year, with the resultant inordinate tax. 

When a company built up around a single group of properties sells 



FINANCING OF OIL COMPANIES 73 

out its property, it is often advisable to divide the property among the 
stockholders in kind, and effect the sale through each stockholder, so 
as to avoid paying the tax in a '^ high bracket." If this is done, the only 
tax paid the government will be on the stockholders' individual incomes, 
which would ordinarily be in a '' lower bracket." This would not apply 
where the company was small and the stockholders men of large in- 
comes. 

The various capital issues, such as notes, bonds, preferred and 
common stock, will be described solely in their application to the oil 
industry. 

Notes and bonds are both forms of mortgage against the physical 
property or earnings of the company, and as such take precedence over 
the stock interest in any division of earnings. They are issued to cover 
the cost of construction of pipe lines, refineries, tank cars, etc. The 
type of issue depends largely upon the money market at the time. 

Notes are usually shorter-term obligations. They are issued at times 
when it is anticipated that they can be paid off in a short time, out of 
earnings, or during periods of high interest which is not expected to 
continue. 

Bonds are usually longer-term obligations, bearing a correspondingly 
lower rate of interest. When interest rates are high, provision is usually 
made for retirement or conversion into some other form of obligation. 

Preferred stock is sometimes issued for the same purpose as notes 
or bonds, but may be of many forms. It may be given the stock- 
holders for money advanced, with a cumulative interest rate, which 
must be paid before the common stock can pay dividends. It is not 
usually a claim against the physical property of the company, although 
it may be if so issued. 

Common stock is essentially a right to participate in the earnings 
of a company, after its capital and operating charges have been met. 
The voting power may lie entirely in the common stock, thus giving such 
stockholders the right to elect all directors and, through their directors, 
to dictate the policy of the company. Common stock differs from 
preferred stock in that it has no fixed dividend rate. 

Stock of no par value is a common form of issue today. Each share 
of such stock represents a right to a fractional part of the total earnings 
of the company in its proportion to the total number of shares. Thus, 
its intrinsic value is based upon an appraisal or estimate of the com- 
pany properties and earning power at any one time. For this reason 
its real value varies constantly. Its main advantage is that, when 



74 FINANCING OF OIL COMPANIES 

given as a bonus to the stockholders, it can only be taxed as income up 
to the value at time of issue. It may later increase in value, but the 
increase is not taxable until the stock is sold and the profit taken as 
cash. 

In a few cases, one individual holds the property as trustee for the 
owners, of whom, he may or may not be one. In such a case, a certifi- 
cate to this effect, or an equivalent, is given by the trustee to the owners 
severally. This method is used where corporate ownership has im- 
portant disadvantages. 

An interesting form of capital issue has sprung up in recent years in 
the oil industry at times of boom conditions. It was frequent in the Mc- 
Keesport gas pool. This is a subdivision of acreage held by a company 
into fractional units. These units are thus direct claims to the production 
from such holdings, and the owners of such units hold assignments to 
their fractional interest. This has the advantage of more direct partici- 
pation in earnings. The disadvantages are that such a property is 
usually very poorly operated, and there is usually little incentive for 
careful operation after the units have been sold to widely scattered 
holders. 

Owing to the constant recurrence of emergencies, as previously 
mentioned, it is convenient to have in reserve a considerable block of 
treasury stock, which can be sold for such purposes. The other alter- 
natives are the formation of subsidiary companies, or the issuance of 
bonds or notes for constructive work, issued when the investment is of 
a more permanent type. Thus, notes may be issued for a small pipe 
line or refinery built to serve during the flush production of a certain 
pool or group of pools. Such obligations should be paid off during the 
early life of the property while the earnings are very high. Bonds 
may be most properly issued to take care of the cost of main trunk pipe- 
lines, or larger refineries at important centers of production or market- 
ing. 






CHAPTER XI 
ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 

An efficient, dynamic organization may be the most valuable element 
in a company. In fact, a company without production, but with an 
excellent plan for acquiring oil production, and an organization com- 
posed of individuals of high ability and reputation, has frequently been 
able to finance itself on this alone. 

Choosing an Executive. — In choosing an executive to head an oil 
company, a number of factors present themselves for consideration, 
among which are the following: 

1. Training and experience. 

2. Acquaintance and personal connections in the oil industry. 

3. Reliability or dependability. 

4. Judgment in taking chances. 

5. Organizing ability. 

6. Honesty. 

7. Family relations. 

8. Capacity for taking responsibility. 

Past training and experience is a particularly necessary qualification 
in the oil business, as this business differs so markedly from all other 
lines of industry. The operations of mining probably offer the closest 
parallel to those of the producing end of the oil business. At the same 
time, as in all other himian affairs, training, ability, energy, and general 
intelligence will balance many years of past experience. 

Another by-product of a considerable past experience lies in the 
number of acquaintances made and the personal connections built up. 
In an industry where cooperation in the field is so prevalent and neces- 
sary, these personal connections are an invaluable asset. In fact, they 
are the principal one possessed by certain successful individuals in the 
oil-producing business. 

Thus, personality plays an important part in the qualifications of 
an oil-company executive. His ability to talk with the men in the 
field and to deal with them successfully and on friendly terms are 

75 



76 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 

particularly important in an industry where such contacts are so much 
more frequent than in other industries. 

In proportion as the company grows, or as its operations become 
more widespread, the details must be left more and more to subor- 
dinates, and the executive must have, as in all other industries, a high 
degree of organizing ability. He should not build so much for machine- 
like efficiency, as is the tendency in manufacturing plants, but should 
aim to build a dynamic organization with ability both to meet and to 
anticipate the emergencies which so often arise. 

A company which is building for future production, where com- 
petition is keen, must not only be among the first to have representa- 
tives on the ground, but must see that these representatives have ability 
to appreciate and weigh the wide differences in values. This means an 
ability on the part of subordinates to take responsibility intelligently, 
and to carry out the spirit of instructions given. 

Again, as operations become widespread, the executive must depend 
more and more upon the information gathered by scouts and field 
men, as a basis upon which to act. This necessitates a careful selection 
of the sources of such information, and a carefully built up news- 
gathering system, both by the company men and by their friends. 

The wide latitude thus allowed by executives to their subordinates, 
and the frequent opportunities offered the latter to serve their own 
interest against that of the company, make it necessary to insist upon 
the most scrupulous honesty from the top of the organization down. 
This is particularly true when an organization is large, and direct super- 
vision impossible. 

The extent to which individual interests may be taken cannot be 
left to the judgment of the subordinate. The executive must be pre- 
pared to decide as to just what is permissible and what cannot be 
allowed. In general, it may be said that most companies do not allow 
employees to own leases in any district in which the company operates. 
It is generally considered proper, however, for employees to own roy- 
alties, if time is not lost because of it. 

The matter of putting relatives on the payroll must be decided by 
each executive. In general, the practice is dangerous, in that poor 
men may be kept in place as against better, or the usual discipline may 
not be enforced in the case of relatives. It is apt to hurt the morale of 
the company by making other employees feel that the best chances for 
promotion will go to such family connections. However, when loyalty 
can be better secured in this way, and undue favoritism is avoided, 
there should be no hesitation. 



SCOPE GIVEN DEPARTMENT HEADS 77 

Scope Given Department Heads. — Where the home office of an 
oil company is far removed from the field of operations, more authority 
must be delegated to department heads. The less such heads are 
burdened with the obligation of making unnecessary reports and ob- 
taining approval for their acts, the more attention they can give to the 
real business of producing oil. One of the largest foreign interests 
operating in the past in the United States insisted, to too great a degree, 
upon all matters of any magnitude being referred to the home office 
for decision. As a result, the lost motion and time involved in this 
reference has slowed up operations to such an extent that the American 
subsidiary of this company has been greatly handicapped and rendered 
less aggressive. There has been a partially compensating advantage in 
that relatively few bad purchases have been made. 

Assuming that good men have been chosen as department heads, 
they should be given freedom of decision in a wide field, subject only 
to revision of policy from time to time. The heads of departments 
should usually be older men, with young and active subordinates. 

The heads of the various departments should be in such close touch 
with one another that when purchases, sales, or important changes in 
operation come up for decision, the combined judgment of the de- 
partments concerned is quickly available. 

The Empire Gas and Fuel Company at one time had a form upon 
which was entered a digest of the case under consideration. This was 
passed on from officer to officer on the list, each one entering his com- 
ment or pertinent data from his office; the final action was taken in a 
joint conference called for that purpose, if the matter was of sufficient 
importance. 

A clear understanding as to the scope of each man's work is, of course, 
necessary, to avoid conflict. For this purpose a graphic chart of the 
entire organization can be posted in each department, and copies filed 
at the home office. This, of course, is subject to revision. 

An organization chart of a well-organized company, showing only 
the main subdivisions, is shown herewith (Fig. 3). 

Charts showing the present organization of various other large oil 
companies are also given (Figs. 4-9). 

It sometimes happens that, as promotions are made, an individual 
charged with certain duties may be moved up and made an official of 
the company. In addition to his new duties, he may still retain over- 
sight of his old department. Thus it is common practice for a large 
company to have a number of vice-presidents, who have been pro- 



78 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 



DIRECTORS 



SECRETARY 
TREASURER 



PRESIDENT 

OR 

MANAGING DIRECTOR 



LEGAL I IaCCOUNTINg] |QPERATING| |lAND| | GEOLOGICAL | | SCOUTING 



Ipurchasing) I wildcatting I I producin-g"! I ENGINEEHING [ 

Fig. 3. 



stockholders 



directors 



president (eastern OFFICE) ] 



vice-president 
western manager 



PRODUCTION 



engineering I 



land 



scouting 



geological 



purchasing 



gas I 



VICE-PRESIDENT | | SECRETARY | | TREASURER 



accounting 



Fig. 4. 



SCOPE GIVEN DEPARTMENT HEADS 



79 



stockholders! 



DIRECTORS I 



PRESIDENT 

& 
MANAGER 



EXECUTIVE COMMITTEE 



VICE PRESIDENT 



TREASURER 



SECRETARY I 



AUDITOR 



REGISTRAR 



I 




















1 


1 


, 1 , 


1 


1 


n 1 


LANDDEPT 


PRODUCTION 1 


[legaiJ 


DEVELOPING 


geological 


engineer 
ing 
























ACCOUNTING- 
DEP'T. 




- 










1 






REFINING 




purchasing| 


TRAFFIC PIPE LINES 




gasoline I 



Fig. 5. 



STOCKHOLDERS 



DIRECTORS 



PRESIDENT 



VICE-PRESIDENT 



GENERAL MANAGER 



GEOLOGICAL | - H ENGINEERING 



r DEVELOPING 



- PRODUCTION 



LAND 



-[ 



PURCHASING 



PERSONNEL 



AGENTS FOR 
DIFFERENT STATES 



TREASURER 
1 



I SECRETARY 



ACCOUNTING 



Fig. a 



80 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 





STOCKHOLDERS 


] 




1 








1 DIRECTORS 
' i— ' 






PRESIDENT I 


VICE-PRESIDENT 1 




TREASURER 




SECRETARY 




1 






1 










CRUDE OIL DEFT, 




1 REFINING 






















j GENERAL MANAGEr[ 








GENERAL MANAGER 






LAND 


1 1 


ENGINEERING 




1 L, , LJ=^ ,J , 










SALES 


TRAFFTP 


1 


GASOLINE 1 


J 1 


1 GEOLOGICAL 


[ 
































.r 


DEVELOPING | 




— 


PRODUCTION 










h- 


SCOUTING 1 














— 


LEGAL 


1 












PURCHASING 












— 


SALES 


1 










— 


TRAFFIC 












L— 


PIPE LINES 


FiG. 7. 



PRESIDENT 



stockholders! 



DIRECTORS 



VICE-PRESIDENT 

& 

GENERAL MANAGER 



ENGINEERING 



PURCHASING 

& 

TRAFFIC 



GASOLINE 

& 

SALES 



DEVELOFME^^T 

& 

PRODUCTION 



TREASURER 



SECRETARY 



ASSISTANT-TREASURER 



ACCOUNTING 



Fig. 8. 



ASSISTANT 
SECRETARY 



LAND 

& 
LEGAL 



I 






SCOPE GIVEN DEPARTMENT HEADS 



81 



moted from the ranks. Each vice-president retains direct oversight of 
that part of the work of the organization with which he is most famihar. 
This division of responsibiUty may be on a basis of territory or kind of 
work. Thus, one vice-president may be assigned to the Gulf Coast, 



STOCKHOLDERS 



DIRECTORS 



EXECUTIVE COMMIT.T-EE 
















f 
















PRESIDENT 




VICE-PRESIDENT 




SECRETARY-TREASURER 






1 










1 












1 




1 , 




1 PURCHASING 


LAND DEPT, 




ACCOUNTING 




STOCK j 




















1 SALES 
















J REFINING 
























TRAFFIC 1 




















ENGINEERING 






{ GEOLOGICA 


l] 








SCOUTING 






















\ LEGAL 




















\ PRODUCTION 






\ PERSC 


NNEI 


J 





GENERAL MANAGER 
GAS COMPANY 



PIPE LINES 



GAS 



Fig. 9. 



another to the Mid-Continent, still another to the Wyoming field. In 
another company, one man may have charge of pipe lines, one of pro- 
duction, and one of the legal department. 

No one form of organization is best. The form must be built up 
according to the history and policy of the company, the field in which 
the company is operating, and especially the training, experience and 



82 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 

individuality of the officials. In a smaller company, of course, each 
individual must cover more ground in detail. 

Assuming a well-thought-out plan of organization, the most valuable 
asset is a spirit of perfect co-operation. Anything which tends to 
hamper such a spirit should be eliminated. This may be a recalcitrant 
individual, a cumbersome system of reports, or lack of attention upon 
the part of executives to suggestions made. 

It may be advisable to hold frequent meetings, to take up matters of 
policy, to discuss matters of general interest, and to receive suggestions. 
Final decision should always remain with one responsible head, as no 
committee can function with the same efficiency as an individual execu- 
tive with sufficient power. This is particularly true of the purchaser of 
supplies. Supplies can be bought to the best advantage by a general 
purchasing agent for all departments. 

Friction frequently develops between the land and the geological 
departments. This is best met by causing both to function under 
one responsible head, who may be either the geologist, if his ability and 
experience are broad enough, or an efficient land man, if one can be found 
who is sufficiently scientific in his viewpoint to make full and proper 
use of his geological department. The appraisal work belongs here 
rather than with the accounting department, as the problem is highly 
technical and requires the service of the geologist. Since a company's 
success depends mainly on the choice of leases taken and properties 
purchased, the head of the land department, in this large sense, holds 
the second most important position in the company. If the manager 
is a specialist in this field, the department may come directly under him, 
as is the case in a few companies. 

The scope of the engineering department differs with the functions 
of each company. In a large, well-integrated company the engineer- 
ing department must oversee all construction, run land lines for the 
land department, and often furnish instrument-men to co-operate with 
the geological department. More recently, company engineers have 
been obUged to co-operate with the accounting and geological depart- 
ments in the computation of depletion and tax returns to the govern- 
ment. 

In a strictly producing company, the engineering department may 
well be subsidiary to the land and geological department; but in in- 
tegrated companies its diverse activities raise it to the status of a sepa- 
rate department. In a few cases it may even include the geological 
department, but this is not desirable. The status of such a depart- 



REPLACEMENT OF EXECUTIVES 83 

ment must inevitably depend somewhat upon the caHber and training 
of its head. 

Compensation. — Good men should be secured for all positions, even 
at some advance over the customary remuneration. The salary should 
be determined by the following considerations: 

1. Value of the individual's services to the company. 

2. Ability of company to pay. 

3. Ability (of executive) to keep down expense without loss of dis- 
proportionate efficiency, 

4. Opportunity that the company can offer for promotion or greater 
compensation. 

5. Men available in view of the particular company's limitations. 

The maximum results with the minimum expenditure is the end 
aimed at, although this may be gained in many ways. Too close 
paring of salaries and wages at one time may reduce efficiency 
later. 

An executive's compensation may consist of one or several of a num- 
ber of elements, such as the following: 

1. Salary. 

2. Contingent stock interest. 

3. Outside interests within limits, or freedom of time for such 
personal interests. 

4. Prestige of the position, or reputation gained through success- 
ful administration. 

5. Experience and information which he may reasonably hope will 
lead to future advantage by offers elsewhere or advances to meet such 
offers. 

6. Personal interest in certain properties operated by the company. 

Replacement of Executives. — One of the most valuable assets of 
a company is what has been called its " going concern " value. This 
means the combination of its up-to-the-minute information plus its 
organization, by which it can meet a situation more quickly and effici- 
ently than a newcomer in the field. 

This value can be very much lessened by the loss of important execu- 
tives at critical times. For this reason, each executive should have an 
understudy within the organization, who can carry on his work at short 
notice. A system of selective promotion from the ranks improves the 
morale, and at the same time makes less likely a too independent atti- 



84 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 

tude on the part of department heads, or a tendency to play officers* 
interests against the company. 

The alternative to such a system is to bring in an outsider occasion- 
ally, to replace a retiring executive. This is known as '' bringing in 
new blood " and is necessary where there is no subordinate worthy of 
promotion. It often tends to freshen and strengthen the policy of the 
company with new ideas and aggressive tactics. When expansion 
necessitates a new department, with a new head, it is usually better to 
take someone already skilled in that field and hence outside the company. 

The advantages and disadvantages must be considered in each 
case, in order that the organization as a whole may continue to run as 
smoothly as possible. 

Expense of Organization. — The expense of the company organi- 
zation should be adjusted to its income and the potential value of the 
properties. During the preliminary constructive period it may be 
excessive if measured in terms of income, but the excess may be justified 
by the company's policy in acquiring new properties. 

Also, during periods of business depression, the expense of the 
organization cannot be cut down in the same ratio as its earnings, 
without destroying its morale and leaving the company in poor shape 
to cope with the succeeding period of activity. This is a question 
which must be considered carefully before cutting too deeply, for it 
means destroying some of the " going concern " value of the organiza- 
tion for the sake of mere present economy. 

Expert Services. — The necessity sometimes arises for various forms 
of investigation requiring special expert services. These may be 
grouped under the following heads: 

1. Legal. 

2. Geological or chemical. 

3. Taxation. 

This work may perhaps call for greater speed or more highly spe- 
cialized knowledge than that possessed by the permanent staff of a 
company. In some cases, while the permanent staff may be com- 
petent to do such work if given the time and facilities, the immediate 
necessity for results may make it advisable to call in outside help. 
This is especially true in the legal department, where the regular force 
is occasionally supplemented. 

A more recent use for expert services has arisen with the increased 
application of geology in the oil fields. While a company is using the 



EXPERT SERVICES 85 

full time of its entire geological staff in the regions where it is operating, 
a property may suddenly be presented for purchase in an unknown 
district. In that district there may be a consulting geologist with an 
intensive knowledge of local conditions, and his services, while relatively 
high-priced on a per diem basis, may still be economical, in the long 
run, for any one of the following reasons: 

1. Organization men are not taken away from pressing routine 
work. 

2. No time is wasted in familiarizing organization men with gen- 
eral conditions in a new field. The local consultant already has these 
general conditions in mind, with a highly specialized knowledge of that 
particular field. The only extra data necessary for him would be those 
pertaining directly to the property in question. 

3. By using such help, as needed, the company can keep a smaller 
staff of routine men, as the specialist is only hired for short periods. 

Of course, the reputation and personal probity of such men should 
be carefully investigated before they are employed. 

In recent years, the matter of governmental taxation has necessitated 
an immense amount of appraisal work on the part of all companies. 
Except in a few cases, none of them have been in a position to make up 
their own returns to the government with full confidence that they would 
be accepted, or that full advantage had been taken of the permissible 
deductions in the company's favor. These conditions have led the 
companies to employ various consulting engineers who are especially 
familiar with such problems and with the law. The engineer may be 
called in merely as a consultant, to advise the company's staff as to 
methods and forms; or he may put in his own staff temporarily, to work 
up all the data for tax returns. The latter procedure has been found 
to be the most satisfactory, in the long run, for the average company. 
However, as time goes on and the legal features become more generally 
understood and stabilized, the more efficient among the large com- 
panies will undoubtedly train their own staffs to handle this work. 

The relative advisability of doing tax work within the organization, 
or having it done by experts, is a question which will be decided on a 
basis of relative economy of time and money spent for results. It is 
no doubt true that certain firms of consulting tax experts can continue 
to do this work more cheaply and to better advantage, and can save 
more money for the client, than the client himself can reasonably hope 
to do with his own organization. One very important factor in such 



86 ORGANIZATION AND DEVELOPMENT OF THE PERSONNEL 

ability is the close contact which the consultant maintains with the 
governmental bureaus in Washington, and which cannot be main- 
tained by a special interest. In fact, Government men from the bureaus 
in Washington frequently ally themselves with such firms of consultants 
upon leaving the Government service. 

Finally, a company may consider entering one of the allied branches 
of the industry, with which the executives are only partly familiar. 
Experts may be called in to report upon construction and operating 
costs, local competition, markets, probable profits, etc. For example, 
a producing company would probably need such a report before build- 
ing a refinery. 



CHAPTER XII 
THE OIL COMPANY PROSPECTUSi 

The prospective oil investor usually learns about an oil company 
from a prospectus, an advertisement in a periodical, an annual report, 
a salesman, or an associate who in turn has learned about the company 
in one of these ways. If a salesman has been the instrument, he will 
ordinarily supplement his appeal with a prospectus. The advertise- 
ment must be so brief and of such a character that it will lead the reader 
to make additional inquiries concerning the company. This com- 
monly means securing a prospectus or annual report. It is the purpose 
of this chapter to point out the special features which the reader should 
look for in an oil company prospectus, and which the writer of the 
prospectus should therefore furnish. 

The company may be started with the purchase of producing wells 
or it may plan to develop new lands. Where there are producing wells 
the prospectus should give a map drawn to scale, showing the relation 
of these wells to each other, the boundaries of the leases, the dry holes 
both on and off the property, and the other producing wells, if any, in 
that pool. The depth, date of completion, and thickness of the sand 
for each well should be given, together with the monthly production for 
each lease and the number of wells producing during each month. 

One of the most glaring and common faults is the exaggeration of 
the nimaber of wells yet to be drilled on each lease. The number of 
acres allowed for each well varies with the cost of each and with the 
expected yield; but unless the wells are less than 1000 feet deep, it is 
best not to have more than one well to every 61 acres. Ten acres to 
the well is closer to the ideal for the average combination of cost and 
yield, and this generous spacing may be attained if the lease is so large 
that prospective drilling along the boundaries does not necessitate a 
greater number of wells. 

The fact that a part of a lease is productive by no means indicates 
that it will all be productive. Indeed, it is often the " edge " lease 

^ Reprinted, with revision, from the New York Evening Post Oil Industry 
Supplement, August 31, 1918. 

87 



88 THE OIL COMPANY PROSPECTUS 

that is somewhat problematic, and this is the very one that is frequently 
the basis for the formation of a new company. The producer need 
not wait to drill dry holes before he grows skeptical of the productivity 
of the undrilled portion of his property. He frequently knows that he 
is approaching the edge of productive territory, because the well records 
show either progressive thinning or interbedding of the oil sand with 
shale, or reduction of porosity in a given direction. 

Another common error in many a prospectus is the assumption that 
the new wells that are to be found on a partly developed lease will have 
as high an initial production as those already drilled. There are two 
reasons why this is not ordinarily so: First, there is a loss of pressure 
through the earlier wells, so that when the later wells are opened there 
is no longer the strong pressure requisite for a large well. Except in 
unusual pools, one may say that after the pool or even a lease is half 
drilled, later wells can no more than suffice to make up for the decline 
in the earlier wells, and will often fail to do even that. As an instance, 
the Deaner, Oklahoma, pool nearly reached its highest point when only 
66 of its wells had been drilled, although it later had 104 wells, and there 
are probably more to be drilled. Secondly, more frequently than not, 
the drilling of wells is hurried in the richest parts of the pools and the 
poorer portions are left till later. Thus, the late wells in any pool are 
generally located in an inferior, fringing zone around the earlier drilled 
portion. Of course, the discovery well is sometimes a poor " edge " 
well, but development soon directs activity to the richer center, so that 
the rule applies even in such cases. 

The prospectus should discuss the possibilities of a deeper sand that 
may be discovered later, as well as lower sands that may be developed 
on undrilled portions of the leases. Where an anticline is producing 
from a shallow sand, chances of a rich, deep sand are sometimes of great 
importance. The Gushing, Garber, Mexia, Salt Greek and Eldorado, 
Kans. fields are examples where this has proved to be the case. Indeed, in 
the case of Salt Creek there is still an excellent chance of still deeper 
sands. 

The quality, price, and marketing facilities of the oil, or the ex- 
pected oil, should be given consideration in the prospectus. Some- 
times it is admitted that the oil is heavy, but the claim is made that it 
has extraordinary value as a lubricant. Such a statement should be 
taken with great skepticism, as only rarely have such claims actually 
been justified in the price eventually realized for the oil. 

Where the prospectus makes much of the high gasoline content of 



THE OIL COMPANY PROSPECTUS 89 

the oil, the reader should bear in mind that, in general, wells are smaller 
where the oil is very light. In general, a well that has the average grav- 
ity for its general district in the sand in question is likely to be larger 
than if the oil were either lighter or heavier. 

The rate of decline in the production of oil wells is greater than is 
popularly supposed. Hence, to lay great stress on present earnings is 
unfair. In the case of the McKeesport gas boom of 1919, although 
gas has produced fewer booms than oil, an investment exceeding 
$20,000,000 produced a product of only $2,750,000. It was this prac- 
tice that led to the absurd overvaluations in some of the Towanda, Ok- 
lahoma, royalties, where some of the units sold consisted of 1/60,000 
of a 1/6 interest of a 1/8 royalty of 80 acres. Especially before investing 
in royalties, should the investor inform himself of the rate of decline to 
be expected in the class of properties in question. In fact, this factor 
alone usually determines the success or failure of the investment. 

Passing now to the data which should be presented in respect to 
undeveloped leases — and this applies in part to the undeveloped por- 
tions of leases partly developed — the prospectus should contain a com- 
plete list of the leases, giving in tabular form the acreage, length of 
term, royalty, rental date, and date when the first rental is due. The 
location of the best favored leases should also be shown on a map, 
which should indicate by contours the geological structure of the region, 
if this is public or already in the hands of competitors. The text should 
state the depths to the horizons from which production is expected, and 
the reasons for believing that production may be found at such horizons. 

Financial data should include the amount of stock outstanding, an 
inventory of any cash on hand or property other than the developed or 
undeveloped properties, and the amount of stock being offered and at 
what rate, also the amount held as treasury stock, if any. 

A complication in buying stock in a company is that the investor is 
not merely buying a share in a definite property, but is also buying a 
share in such properties as the management may later buy or develop. 
The prospectus must therefore give the personnel of the directorate 
and officers, and should outline their policy. The investor should also 
remember that, in the oil business especially, the management should 
be in the hands of specialists; therefore the interested investor should 
not be greatly impressed by the names of prominent bankers, farmers, 
or miners in the directorate or on the list of officers. Many such 
locally prominent people have had no better judgment than to actually 
buy, as a speculation, subdivisions of leases twenty feet square. This 



90 THE OIL COMPANY PROSPECTUS 

is an ancient swindle and has become a joke among oil men, but is still 
perpetrated at intervals. 

On the other hand, while ill-advised purchases or development on the 
part of the management may ruin a hitherto promising company, a 
really efficient company has an important value as a going concern. 
Its widely distributed staff gathers information that is collectively of 
great value, and landowners are constantly bringing their offers to such 
an organization. 

Any one oil lease, unless it be of a very unusual character, has too 
short a career to constitute the property base for an oil company. The 
best profits must be expected in the company which keeps on hand an 
adequate reserve of promising undrilled lands and which acquires more 
leases as these areas are developed. In fact, if the company owns a 
refinery, its needs demand such a continuation policy. In these then, 
all the more, must the investor be influenced by considerations of the 
efficiency of the personnel. This efficiency cannot be measured by the 
financial status of the company at any one particular time. 

Since the productive leases will soon decline, it follows that the 
investor, when examining the prospectus or the annual reports of oil 
companies for a choice of investment, should consider the reserves of 
leases on hand as second in importance only to the producing property 
on hand. It is the quality, rather than the mere quantity, of leases 
that must be considered. The heavy burden of annual rentals on an 
extensive but ill-chosen reserve can ruin even a strong company. 

The reader of the prospectus may properly feel alienated by devices 
generally characteristic of lurid stock promotion and not based on sound 
practice. One such method is offering stock at absurdly small par val- 
ues. There can be no sound reason for par values of less than $10 per 
share in any oil company, because the very small investor who would 
desire less than an investment measured in $10 units cannot afford to 
give the amount of study required in selecting so variable a thing as an 
oil investment. Much space devoted to the profits that other people 
have made by investing in other oil stocks raises the presumption that 
there is a lack of merit in the present offering, since it must resort to 
devices not based on its own merit. Other common faults are the 
announcement of an advance in the offering price to take place at a 
set date, and the use of pictures of the large wells of other companies 
or of pictures of the promoters or officers, before the company has won 
its way. In general, appeals to feeling should repel a man who is looking 
for real information in the prospectus. 



THE OIL COMPANY PROSPECTUS 91 

Where professional maps are given or professional reports are 
quoted, the investor will do well to discriminate as to the degree of 
expertness of the author cited. Where the report is paraphrased, the 
investor should ask to see the original report; this is also a wise plan to 
follow if the abstracts do not seem to be fairly selected. 

The wise investor, then, should be very much more discriminating 
in his judgment of oil companies, and of the oil company prospectus, 
than he is. A critical examination of the prospectus permits the well- 
informed reader to winnow out those companies which are worthy of 
further attention from those whose success is unlikely, for a company 
not equipped to present a proper prospectus is presumably less well 
equipped to operate successfully. 



CHAPTER XIII 
THE ANNUAL REPORT 

The board of directors annually submits a report to the stock- 
holders. This gives in summary form a survey and statement of 
operations, incomes, expenditures, the state of the finances of the 
company and the condition of its properties at the close of the fiscal 
or the calendar year. This report is usually compiled with the sec- 
ondary purpose of interesting potential stockholders and retaining 
the confidence of the present stockholders. Inasmuch as it is the 
only definite, official information given to the investors, the report 
should be a complete digest of all the leading affairs of the corporation. 
It is the barometer of the business and is used by the stockholders, 
as well as by bankers, brokers, credit men and the corporation man- 
agers. 

The treatment of the information in the annual report should be 
clear and attractive. Many stockholders and investors have little 
or no training in accounting. They are unable to analyze complex 
financial statements, and therefore they will greatly appreciate a 
simple and clear report. Furthermore, as many copies of this an- 
nual report may be used to attract new investors, a further effort 
should be made to compile not only a clear and concise report, but 
one that is noticeably attractive. 

The liberal use of maps, charts, graphs and even of photographs, 
aids materially in making the publication interesting and readable. 

The annual report should give three definite kinds Of information: 
— first, the personnel of the corporation; second, accounting re- 
ports; and third, comparative statistical data and miscellaneous 
reports. No set rule has been followed as to the order of presenting 
this material, save that the personnel data are placed at the beginning 
of the report. 

The following outline gives a suggestive order for the arrange- 
ment of the annual report. When the accounting material pre- 
cedes the comparative and miscellaneous data, the reader of the 
annual report is acquainted with the present and immediate condi- 

92 



11 



THE ANNUAL REPORT 93 

tions of the corporation before noting comparisons with past periods 
and related subjects. 

1. Personnel. 

(a) Name of corporation. 

(6) Address of general offices. 

(c) Names and addresses of Board of Directors. 

(d) The Executive Committee. 

(e) Names and addresses of officers, including at least the 

President, Vice-President, Secretary and Treasurer. 
(/) Name and address of Transfer Agent. 
(g) Name and address of Registrar of Stock. 
(h) Name and address of General Counsel. 
(i) Names of heads of departments 

2. Accounting reports. 

(a) Income statement. 

(1) Gross earnings. 

(2) Expenses. 

(3) Net earnings. 

(4) Interest, taxes, etc. 

(5) Net income. 

(6) Dividends. 

(7) Surplus and reserves. 

(&) Statement of the surplus account, 
(c) Balance sheet. 

(1) Fixed properties with a statement of additions, de- 

preciations, depletions and replacements. 

(2) Inventories. 

(3) Bonds and mortgages. 

(4) Capital stock. 

3. Comparative statistics, valuations, prospects, miscellaneous 
reports. 

(a) Comparative income statements. 

(b) Depletion and depreciation analysis. 

(c) Production data. 

(1) Oil produced. 

(2) Royalties. 

(3) Leases. 

(4) Size of wells. 



94 THE ANNUAL REPORT 

(5) Operations. 

(6) Valuations, not necessarily complete or elaborate. 
(d) Miscellaneous reports. 

At the close of the report, certification by an accounting firm or an 
auditing committee, as to the correctness of the accounting state- 
ments, is usually made. 

Decisions to widen the scope of the company should be stated, 
with the reasons. As soon as these have led to construction which 
can be shown by photographs, the latter should be given, if instructive. 
Where a company publishes a " house organ," as does the Marland 
Oil Company, such material can be given to the stockholders at 
more frequent intervals than if it were included in the annual report. 
For instance, one recent report contains an address by the president 
of the company on the building of casinghead plants and their results. 
Another gives a summary of the construction and operation of a new 
refinery, using graphs to drive home the important facts. A third 
shows photographs of its new pumping stations and model drilling 
plants to the stockholders. 

(1) Personnel Information. — All the material needed to cover 
the personnel of the corporation can be placed on one page at the 
opening of the report. The importance of this information is ob- 
vious. These are the persons who carry the responsibility of directing 
and protecting the stockholders' investment. Upon them rests 
the final success or failure of the corporation. As one stockholder 
put it, when questioned about the reliability of his pet corporation, 
" By their personnel ye shall know them." Then he proceeded to 
name the leading officials, in order to impress upon his hearer the 
security and stability of his enterprise. 

The stockholder should be able at all times to locate the general 
offices, the stock transfer clerks and the registrar of stock holdings, 
in order that he may be able to get in touch with these departments 
quickly, should occasion demand. To many, the annual report is 
the sole source of such information. 

(2) Accounting Reports. — 

(a) Income statements. 
Many boards of directors are reluctant to give out detailed in- 
formation regarding the sources of income and the avenues of ex- 
penditure, and the cost of printing such information would not be 
authorized. 



PROFIT AND LOSS STATEMENT 



95 



The following form exhibits a typical income statement, sxmimary 
in nature, giving little detailed information. It does, nevertheless, 
tell the important story, whether the company is making or losing 
money and how much. This is about all of the necessary detail that 
the stockholder hopes to glean from income reports. 

SUMMARY INCOME STATEMENT 
Dec. 31, 1921 



Items 


12 Mos. Ending 
Dec. 31, 1921 


Previous 12 Mos. 

Ending Dec. 31, 

1920 


Increase 


Per cent 


Gross earnings 










Depreciation and Deple- 
tion Reserve 




Expenses 








Net Earnings. 

Interest, Taxes, Etc 










Net Income 

Dividends Preferred 
\ Common 










Carried to Surplus 











The above summary is drawn from the detailed and complete 
profit and loss statement, which is one of the two reports that the 
accounting department compiles annually. Although it is not a 
common practice to give the detailed profit and loss statement in 
the annual report, the inclusion is becoming more frequent. The 
following is an illustration of a profit and loss statement in complete 
form: 

PROFIT AND LOSS STATEMENT — ADVANCE OIL COMPANY 
For year ending December 31, 1921. 
Gross Income 

Total Oil Sales (less any royalties*) $ 

Production Costs 

Drilling $ 

Labor, Teaming and Freight 

Superintendence 

* The royalties are usually paid direct to the landowners by the company pur- 
chasing the oil and so do not appear on the books of the producing company. 



Q6 THE ANNUAL REPORT 
Miscellaneous 



Total Production Costs $ . 

Operating Costs 

Maintenance and Repairs $ . 

Wages 

Pumping 

Cleaning \ 

Depreciation on Buildings and Equipment. . . 

Depletion 

Royalties 

Extraordinary Losses and Expenses 

Teaming 

Miscellaneous Expenses 



Total Operating Costs 

Total Production and Operating Costs . 

Inventory Adjustment 
Crude Oil Inventory. 

Jan. 1, 1920 

Dec. 31, 1920 

Add the Decrease in Inventory 



Cost of Oil sold $ . 

Gross Profit 

Administration Costs 

Office Salaries $ . 

Stationery and Supplies 

Postage, Telephone and Telegraph 

Depreciation-Office Equipment 

Light and Heat-General Office 

Miscellaneous Office Expense 



I 



Total Administration Costs $ 



Prime Operating Profit $ . 

Other Income 

Purchase Discounts . $ . 



Interest Received 



Total Other Income $ . 



Charges to Income 
Federal Taxes , 
Bad Debts . . . 



PROFIT AND LOSS STATEMENT 97 



Sales Discounts 



Total Charges to Income $ 

Net Profit for Year 

$ 

(6) The surplus account — its analysis. 

Probably there is no more important information which marks 
the stabiHty of corporate activities than the condition of the surplus 
account. The surplus account shows the extent to which the assets 
exceed the liabilities and stock investment. In reality, it is a finan- 
cial reservoir which supplies the corporation through possible dry 
seasons, as it were. 

Therefore, if the report shows the condition of the surplus account 
for a period of years, the stockholder and investor have an excellent 
opportunity to measure the true health of the corporation. 

The following surplus statement, taken from an annual report, 
is an excellent example of the method of treatment: 

Undivided Surplus of the A Company since Jan. 1st 1915 

Surplus Provided in Organization (Capital Surplus) 

Add: 

Balance of Surplus accumulated since Jan. 1, 1915. (Earned 

Surplus) to Jan. 1, 1921 

Income Statement 

Total Earned Surplus 

Total Undivided Surplus Jan. 1, 1922 

(c) Balance sheet. 

A careful study of the above statement shows that the addition 
to the surplus for the current year is the final balance of the net 
income taken from the income statement. If brief, the treatment 
of the surplus follows as a natural sequence from the income state- 
ment. Net income is surplus created during the last year, while 
total surplus records all net incomes since organization, less, of course, 
tappings of surplus that may have occurred. 

The next step is from the surplus account to the balance sheet. 
The balance sheet portrays all the assets arranged according to definite 
groupings. It also shows the liabilities to creditors, stock responsi- 
bilities to the investors and any surplus and reserves over and above 
the liabilities to creditors, and the stock responsibility. Thus, the 
balance sheet is a cross-section of the business at a given date, show- 



98 THE ANNUAL REPORT 

ing the property values on one side, and the rights to such property 
values, as liabilities, stock, surplus and reserves, on the other side. 
In other words, the balance sheet shows property values balanced 
by property rights. 

The balance sheet, being an analysis of property values, may well 
show the amount set aside for covering depreciations and depletion. 
If it is deemed advisable, supplementary statements may be placed 
in the annual report covering an analysis of these property values. 
Such reports, showing details concerning wells or leases, the amount 
and extent of depletion, detailed valuations, and itemized inven- 
tories, are typical statements that may be used to supplement bal- 
ance sheet items. 

On the liability side also, supplementary statements may prove 
valuable for publication in the annual report. The analysis of 
bonded indebtedness, mortgages and capital stock are suggestive 
items that are sometimes treated supplementarily to the entry in 
the balance sheet. 

The following is an example of a well-arranged balance sheet: 

BALANCE SHEET — ADVANCE OIL COMPANY 

As of December 31, 192 L 

Assets 
Fixed Assets 

Operated Leaseholds $ 

Less Reserve for Depletion 



Lease and well equipment, tank cars, pipe lines and other equip- 
ment 

Less Reserve for Depreciation 



Buildings 

Less Reserve for Depreciation 



Office Equipment 

Less Reserve for Depreciation 



Unoperated Leases 



Total Fixed Assets $ 

Current and Working Assets 

Cash $ 



STATISTICAL AND MISCELLANEOUS REPORTS 99 



Warehouse Inventory 

Inventory of Crude Oil on hand 

Notes Receivable 

Accounts Receivable $ . 

Less Reserve for Bad Debts 



Total Current and Working Assets 

Deferred Expense Items 

Unexpired Insurance $ . 

Advances to DriUing Contractors 



Total Deferred Expense Items $. 



Total Assets $ . 

Liabilities 



Current Liabilities 

Notes Payable 

Accounts Payable 

Accrued Interest Payable 
Accrued Wages Payable . 
Accrued Taxes Payable . . 



Capital Stock 

Preferred $ . 

Common 



Surplus — Dec. 31, 1919 

Undivided Profits for year ending Dec. 31, 1921, 
added to surplus 



Total Liabilities $ , 



(3) Comparative Data, Statistical and Miscellaneous Reports. — 

The material that is embodied in this division lends itself to greater 
originality of treatment than do either of the first two divisions. 
The accounting data are cold facts from which definite conclusions 
may be drawn; but such data are solely inadequate in giving the 
stockholder the kind of information he wants. " How about the 
future of my investment?" — Such is his interrogation, and hence 
much care must be given to the preparation of material that will 
estimate the future for him. New leases and valuations, future pros- 
pects and operations should all be called to his attention, except where 
such publicity would be inimical to further leasing by the company. 
As an investor, the stockholder is as much interested in the future 
success of the undertaking as he is in the present income sheet, and 



100 



THE ANNUAL REPORT 



rightly so. Safety of investment is one of the prime factors in at- 
tracting capital into any undertaking, and safety of investment 
demands definite assurance of future production. 

The table following is an historical and comparative productive 
table of an Oklahoma Company. 



Oil sold during year in barrels 

Revenue for sale of Oil and Gas for year . 

Wells drilled during year 

Total number of wells productive at end 

of year 

Amount invested in purchase of leases, 

or paid as rentals during year 

Total amount invested in leases up to 

the end of year 



1905 


1906 


1907 


16,077 
$6,463 
9 


217,241 

115,374 

52 


331,928 

136,560 

21 


9 


55 


70 


$16,297 


74,708 


34,556 


$16,297 


91,005 


125,561 



391,843 

167,324 

36 

106 

15,037 

140,598 



An exhibit such as that below, showing a comparative statement 
for five years, will also be enlightening. This statement is of value 
in measuring the growth of the corporation's earning power. At- 
tention is called to the two items appearing at the bottom of the 
table, items of direct interest to prospective investors. 



Item 


Year End- 
ing Dec. 
31, 1921 


Year End- 
ing Dec. 
31, 1920 


Year End- 
ing Dec. 
31, 1919 


Year End- 
ing Dec. 
31, 1918 


Year End- 
ing Dec. 
31, 1917 


Total Gross Earnings 












Expenses 








Net Earnings 












Interest 








Net to stock 












Dividends Pref 








Net to Com. and Surplus 

Dividends Com 
















Surplus and Reserves 
















Number of Times Pref. Div. 
was earned 
















Per cent of Earnings on Aver- 
age Amt. of Com. stock out- 
standing 













■l 



STATISTICAL AND MISCELLANEOUS REPORTS 101 

A map showing at least the principal holdings of the company 
should be included. 

It is customary to make the annual reports of any one company 
of uniform size and form from year to year. This is a great con- 
venience in binding and filing the reports. As there are more items 
of letter size to be filed than any other, this size, with binding at the 
left, is recommended. 



CHAPTER XIV 

COST OF PRODUCING OIL 

The cost of producing oil, if considered chronologically, would be 
divided as follows: 

1. Cost of acquisition of the lease. 

2. Cost of material equipment, which will not be consumed but 
which will remain as physical property. 

3. Cost of drilling the well and placing the equipment in position. 

4. Cost of operating the wells. 

5. General expenses common to the various steps enumerated 
above, such as office rent. 

There are, however, very good reasons for expressing the cost 
in such a way as to aid in distributing it to the individual barrels of 
oil produced. 

The following subdivisions, which are not chronological ones, 
will therefore be substituted. 

A. Lifting, or leasehold, expense (4, above). 

B. Overhead (5, above) 

C. Depreciation (distributed through the productive years of 2, 
above) . 

D. Depletion (distributed through the productive years of 1 
and 3, above). 

(A) Lifting, or Leasehold, Expense. — This is the direct cost of 
getting the oil out of the ground and into the lease storage tank. 
There are included in it such items as direct superintendence, the 
labor of pumpers, lease hands etc., fuel, cleaning, repairs, and main- 
tenance expense applied to the lease. During such time as a well 
flows, and after work has become routine, the lifting expense is nat- 
urally very low, but increases greatly when pumping becomes necessary. 
Various factors, such as greater depth of the producing sand, heavier 
oil, or an oil with a greater tendency than usual to deposit paraffin, 
or any of the operating difficulties such as encroaching water, or 
'* floating sand," will inevitably increase the lifting expenses. In- 

102 



DEPRECIATION 103 

accessibility of location also makes for higher leasehold as well as for 
other expenses, because of the difficulty of getting supplies, the 
necessity of paying higher wages, etc. 

Lifting expense may be figured as the cost per well, over a given 
period of time^ such as a month, which amount is then divided by 
the number of barrels of net production in that time, to obtain the 
cost per net barrel for that month. Once the well is reduced to pump- 
ing, the cost per well is fairly constant. On the other hand, since the 
production of a well decreases as time goes on, while the cost of op- 
erating each well remains approximately the same, the ratio of these, 
or in other words, the cost per barrel, increases as the well grows older, 
(Fig. 10). This change in the barrel cost is very marked, and is 
generally many times larger in the later life of the well than in the 
early years. Although in a field of small wells, such as the Appala- 
chian, the distinction is less important, it is very important to avoid 
using one barrel cost for the whole fife of a well.^ 

(B) Overhead. — Overhead expenses include the general and 
administrative expenses of a company, such as the salaries of officials 
and other office force, office maintenance, legal expenses, etc. This load 
may be distributed variously, but it is best prorated per normal net 
barrel of oil produced. By " normal " is meant an estimate of nor- 
mal production, if on account of shutdown a lease is temporarily 
greatly reduced. Lifting and overhead combined comprise the run- 
ning expenses of an oil property. 

(C) Depreciation. — All physical property or equipment de- 
preciates in value with the inevitable deterioration, or wear and tear, 
resulting from use and sometimes also from obsolescence. While the 
purchase of equipment is a capital investment, it must nevertheless 
be amortized from the income of the property by a charge based on 
the amount of depreciation the equipment will suffer each year until 
it has been paid for, in order that the company may not be impaired 
as a going concern. 

There is no standard method of calculating the depreciation 
charge. One California company uses a rate of 5 per cent per an- 
num on well equipment, and 10 per cent per annum on all other 
producing equipment and fixed assets.^ The following table gives 

^Johnson, Roswell H., and Foster, Alden W., Barrel Costs versus Well-day 
Costs, BulletiQ American Association of Petroleum Geologists, Vol. 4, No. 3, p. 
299. (1920.) 

2 Report of the Federal Trade Commission on the Pacific Coast Petroleum 
Industry. Part 1, p. 119. April 7, 1921. 



104 



COST OF PRODUCING OIL 



5.00 
4.00 

3.00 



1.00 



^.50 

o 
R 



.05 



















r" 






























**"" 
































































. 
















































































































































































































































































































N 


^•5? 
















































S 


V 
















































\ 


V 


















































A 


'^ 


















































V 




































Data obtal-ned from 

Company Operating 

in Osage Indian 

Reservation, Okla. 


\ 














o 












/ 


\ 






















V 




/^ 




^ 










/ 






\ 




















\ 


yy 




















' 


/ 


s^ 














































/ 




\ 










































/ 
















































/ 










































y 












































1 


^ 


' 








































/ 




































^x 










/ 


































1 


y^ 










/ 


































^ 












/ 


/ 












































^ 


/ 




Data obtained from 




































Coi 
in 


XI pa 
mil 


ny 
lois 


Ope 
(154 


rati 
W 


ng 
slls 





























5.00 
4.00 

3.00 



3.00 



S-1.00 



50 



.05 



1910 1911 1912 1913 1914 1915 1916 1917 1918 1907 1908 1909 19J0 

Fig. 10. Costs of operation expressed in well-day units (graph 2), and in 
barrel units (graph 1), for comparison. 



»l 



\ 



DEPRECIATION 



105 



Class 



No. 



Refer- 
ence 



Page 

57 
57 
57 



58 



ll B. 



59 



60 



62 





Useful 
life 


Annual 
deprecia- 
tion 


Drilling equipment 


Years 
4 


Per cent 
40-25-15-10 


Wells 




Dehydrators: 

Electric 


5 

2 

20 
12 
12 
8 
5 

9 
6 

8 
5 
3 
3 

10 
10 

7 

10 
15 
6 
25 
25 
25 

20 
16 
10 

10 
20 

20 

10 

6 

20 
5 

5 

10 


20 


Pipe and tanks 


50 


Tanks: 

Steel 5000-55,000 bbl 


5 


2500-5000 


8i 


Galvanized-iron 500-2500 


8| 


Less than 500 

Wood 


12^ 
20 


For movable tanks: 

Galvanized-iron 500-2500 


lU 


Less than 500 


16§ 


For water tanks: 

500-2500 . 


121 


Less than 500 . . . 


20 


Tools .... 


331 


Transportation equipment 


331 


Water plants 


10 


Electric equipment 


10 




14f 


Buildings: 


10 




61 


Corrugated-iron siding 


161 


Concrete . . 


4 


Brick . 


4 


Steel 


4 


Pipe lines: 


4i 




51 




9 


Less 10 per cent salvage. 
Pump stations 


10 


Tank cars 


5 


Refineries: 

Class L— Located at point assuring a long supply of 

crude oil; or well-constructed plants. 
Class 2. — Located at points assuring supply of 

crude oil for several years. 
Class 3. — Skimming plants and small refineries of 

poor construction, or located at points 

where supply of crude oil is not assured 

for a long period of time. 
Sales or marketing equipment: 

Tankers 


5 

10 
161 

5 




20 


Filling stations — 
Class A. — Ordinary wood or corrugated steel 

construction. 
Class B.— Brick and concrete or extraordinary 

construction. 


20 
10 



106 



COST OF PRODUCING OIL 



Class 


No. 


Refer- 
ence 




Useful 
life 


Annual 
deprecia- 
tion 






Page 
63 

64 


Distributing stations 


Years 
10 

4 
6 

7 
8 

12 
10 
10 
7 
6 
4 
5 
10 

4 
4 


Per cent 
10 




Tank wagons — 
Motor 


25 




Horse 


161 

m 

121 




Steel barrels 




Track and switches 


E 


Natural gas (utility companies): 
Drilling equipment. (See A-1.) 
Wells. (SeeA-2.) 
Gas pipe lines — 
Mains 




1 
2 
3 

4 
5 
6 

7 

1 


81 
10 




Gathering lines 




City lines . 


10 




Compressor stations 


14f 




Gathering stations ....;... 


161 
25 




Field stations 




Meters and regulators 


20 




Considered as a whole plant 


20 


F 


Natural gas gasoline: 

Plant — Compression, with 20 per cent salvage value. 


35-20-15-10 
35-20-15-10 









the depreciation rates recommended by the Income Tax Unit of the 
U. S. Treasury Department.^ 

Depreciation may be distributed to the several years 

(a) by the '' straight-Kne method/^ 

(6) by one of the numerous modifications involving a recog- 
nition of interest,^ or 

(c) upon each barrel of oil. 

In the first method, the total depreciation is distributed in equal 
yearly installments over the life of the property, whereas in the last, 
each barrel of oil produced is assigned an equal share of the depre- 
ciation. In the straight-line method the depreciation charge is 
smaller per barrel in the early ife of the property, when the yearly 
revenue is distributed over a larger number of barrels, and is larger 
per barrel in the later life when the production is less. Therein lies 
the disadvantage of this method. In spite of this it is very common, 
because of its simplicity and the habits of accountants brought in 
from other industries. 

1 Manual for the Oil and Gas Industry, U. S. Treasury Department. 

2 Sailers, Earl A., Principles of Depreciation, Ronald Press Co., New York City, 

N. Y. 



EXAMPLES OF COSTS 



107 



(D) Depletion. — A depletion charge is for the purpose of return- 
ing two items of capital expenditure, (a) costs of acquisition of prop- 
erties, and (6) drilling costs. Within the first are included not only 
bonuses paid for leases, but also geological, engineering, legal and 
other expenses incident thereto. A large part of these latter expenses 
is so difficult to attribute to the respective leases that they are car- 
ried in general expense and not provided for in depletion. 

Depletion may also be distributed in several ways. One extreme 
method is to make the depletion unit per barrel of oil so large that the 
property '' pays out " in three or four years, after which there is no 
depletion charge, and the property is " on velvet." Another method 
is to estimate the life of the production in round numbers, such as 
ten, fifteen, twenty, or twenty-five years, and then distribute the 
total capital expenditure equally over this life. Latterly, because of 
the regulations of the Income Tax Unit, an estimate is made of the 
total ultimate production of each well, and the amount involved is 
distributed equally over each barrel of oil in that total (Chapter XVI). 
This method is difficult for small companies who do not have anyone 
in the staff skilled at estimating oil reserves. 

Royalty. — Royalty may be treated as a cost item. More com- 
monly the pipe line is directed to pay the royalty direct to the lessor. 
In this case, the revenue of the oil company consists only of the money 
paid by_th£ purchasers forJ:he^net oil. 

Examples of Costs — While an analysis of the cost of producing 
oil shows four principal items, lifting, overhead, depreciation and 
depletion, there is no uniform procedure among companies in fol- 
lowing this outline, nor in including always the same charges under 
each head. In citing examples of costs it would not, therefore, be 
possible to show a uniform classification unless all citations came from 
the same source; where a wider range of sources is drawn upon such 
a classification is impossible. The following table (Fig. 11) gives 



Year 



1918 
1918 
1918 
1918 
1918 
1918 



Field 



Appalachian 
Oklahoma 
Osage, Oklahoma 
Chelsea, Oklahoma 
Texas Cretaceous 
California 



Net Prod, m 

bbls. of the 

company 



129,237 
1,236,933 

101,907 
16,622 
25,737 

464,722 



Lifting Cost 
per bbl. 



$1.26 
0.30 
0.37 
0.33 
0.53 
0.16 



General ex- 
pense per bbl. 



$0.57 
0.08 
0.63 
0.19 
0.22 
0.17 



Total Running 
cost per bbl. 



$1.83 
0.38 
1.00 
0.52 
0.75 
0.33 



Fig. 11. Producing costs in the Appalachian, Mid-Continent, Gulf 
Cretaceous and California fields in 1918. 



108 



COST OF PRODUCING OIL 



specific examples of lifting and overhead costs in 1918 in the Ap- 
palachian, Mid-Continent, Gulf Cretaceous and California fields. 

These, however, should not be taken as average examples. 

Variations are due in part to the size of the wells, since unit costs 
are generally larger with smaller wells, in part to the field of oper- 
ation, and in part to the number of wells per company. 

Osage, Oklahoma, costs for 1921 are shown in tabular form 
in Fig. 12, and graphically in Fig. 13.^ 

In this table, lifting, general and overhead, and depreciation 
items are given. 



Number of 


Gross produc- 
tion per Well 
per day 


Production Costs 


per Barrel of Net Production 




Wells 


Lifting 


Overhead 


General 


Depreciation 


Total 


619 


6.58 


0.45 


0.16 


0.12 


0.29 


1.02 


151 


4.57 


0.51 


0.15 


0.19 


0.26 


1.11 


1932 


3.88 


0.51 


0.17 


0.19 


0.30 


1.17 


1284 


2.42 


0.70 


0.20 


0.31 


0.44 


1.65 


1133 


2.13 


0.76 


0.20 


0.35 


0.49 


1.80 


877 


1.79 


0.90 


0.23 


0.42 


0.58 


2.13 


528 


1.31 


1.08 


0.27 


0.57 


0.74 


2.66 



Fig. 



12. Costs in the Osage Reservation, Oklahoma, during the first six 
months of 1921. 



These Osage costs illustrate especially the fact that the smaller 
the well, the greater are the costs per barrel. They also show that 
while the decrease is in the lifting, depreciation and general items, 
the overhead expense remains about the same for wells of all sizes, 
and thus comprises a larger percentage of the total cost of a smaller 
well. 

Figures 14 to 16 afford a comprehensive study of the costs of pro- 
ducing oil in California from 1914 to 1919.^ 

In this study, royalty is considered a cost item and total costs are 
therefore divided by gross, instead of by net, productions. The 
average royalty of the whole production varied from 6.6 per cent 
in 1914 to 8 per cent in 1919. 



1 National Petroleum News,Sept. 21, 1921, p. 29; and Oct. 12, 1921, p. 54. Also 
the Mid-Continent Year Book, 1921, pp. 42-46. 

2 From an excellent chapter in the Federal Trade Commission Report on the 
Pacific Coast Petroleum Industry, 1921. 



4 



EXAMPLES OF COSTS 



109 



J5.00 




















GRAPH SHOWING RELATIONSHIP 

between 

COST & SIZE of a WELL 

in the 

OSAGE 










\ 




















\ 






















\ 


































2.00 








\ 








































\ 


V 


































• 








\ 












































'^ 


^' 










































\ 


\, 


























l.CO 






\ 










\-. 


-^ 































\ 








































\ 


v^ 


^^. 


-^^/ 


C'^n. 


































N 


\ 


"^ 


3/^reT.t::: 
















- 




















., 


Ov, 


-rJTel 


(1 ' 




n 














- 


































..-_^ 


— ^-= 




- 












, 



2 3 4 5 6 

Gross Production per Well per Day 

Fig. 13. 



In Figure 14, costs per barrel are shown in detail. The companies 
whose costs are quoted are grouped according to the amount of their 
production, as follows: 
Group 1 — Companies producing 1,000,000 bbls. or more, per year. 

" 2 '' " 250,000-1,000,000 bbls. per year. 

" 3 " " 50,000- 250,000 bbls. per year. 

" 4 " " less than 50,000 bbls. per year. 

Fig. 14 shows, in addition to the amount of cost creditable to 
each item, the general increase in costs from 1914 to 1919. This 
was due not only to economic and business conditions in general, 
but also to a decline in the production of the average well. 

Variations in the elements, as well as in the total costs, are em- 
phasized in Fig. 15. 

The fact that the smaller well costs more to operate is shown 
in Fig. 16,1 by means of a graph based on the detailed figures for 
California companies in 1914. 

^ After table on p. 126 of Federal Trade Commission Report on Pacific Coast 
Petroleum Industry. 



110 



COST OF PRODUCING OIL 



Year 


Group 


Num- 
ber of 
com- 
panies 


Lifting 
expense 


General 

and 
admin- 
istrative 


Depre- 
ciation 


Deple- 
tion 


Credits! 


Cost 
exclu- 
sive of 
royalty 


Royalty 


Total 

cost 


1914 


1 


10 

18 
38 
30 


$0 049 
.102 
.171 
.240 


$0,046 
.033 
.045 
.060 


$0,067 
.080 
.107 
.183 


$0,069 
.049 
.121 
.193 


$0,004 
.001 
(2) 


$0,227 
.263 
.444 
.676 


$0,018 
.023 
.049 
.045 


$0,245 
.286 
493 




2 




3 




4 


721 




Total 

1 






96 


.068 


.045 


.073 


.071 


.004 


.263 


.021 


.274 


1915 


7 
20 
35 
45 


.053 

.088 
.141 
.250 


.051 
031 
.042 
.111 


.080 
.079 
.116 
.236 


.077 
.053 
.089 
.315 


.006 
.002 
.001 

(2) 


.255 
.249 
.387 
.912 


.022 
.016 
.044 
.069 


277 




2 


265 




3 


431 




4 


981 




Total 






107 


.071 


.048 


.086 


.079 


.005 


.279 


.023 


302 








1916 


9 
19 
43 
45 


.068 
.116 
.194 
.275 


.059 
.038 
.059 
.072 


.077 
.090 
.122 
.224 


.080 
.064 
.107 
.311 


.008 
.002 
.002 

(2) 


.276 
.306 
.480 
.882 


.024 
.022 
.051 

.078 


300 




2 


328 




3 


531 




4 


960 




Total 






116 


.088 


.056 


.085 


.084 


.007 


.306 


.027 


.333 




1 




1917 


10 
19 
49 
53 


.090 
.148 
.239 
.345 


.067 
.044 
.067 
.101 


.091 
.089 
.140 
.244 


.074 
.060 
.126 
.305 


.013 
.002 
.001 
.001 


.309 
.339 
.571 
.994 


.031 
.041 
.051 
,097 


340 




2 


.380 




3 


622 




4 


1 091 




Total 






131 


.113 


.064 


.097 


.080 


.010 


.344 


.035 


.379 




1 




1918 


10 
22 
47 
55 


.105 
.183 
.289 
.431 


.084 
.065 
.091 
.119 


.097 
.105 
.142 
.251 


.072 
.062 
.108 
.295 


.015 
.002 
.001 
.003 


.343 

.413 

.629 

1.093 


.038 
.056 
.061 
.098 


381 




2 


469 




3 


690 




4 


1 191 




Total 






134 


.134 


.082 


.104 


.076 


.012 


.384 


.044 


.428 




1 




1919 3 


11 
22 
39 

47 


.131 
.215 
.325 
.414 


.098 
.068 
.100 
.136 


.101 
.115 
.138 
.262 


.070 
.059 
.119 
.307 


.015 
.003 
.001 
.001 


.385 

.454 

.681 

1.118 


.040 
.045 
.068 
.094 


.425 




2 


.499 




3 


.749 




4 


1 212 




Total 






119 


.156 


.095 


.106 


.075 


.013 


.419 


.044 


.463 



1 Deduction. 



2 Less than one-tenth of 1 cent. 



3 First 6 months. 



Fig. 14. California costs from 1914 to 1919, grouped by size of com- 
pany, per barrel of oil. 



EXAMPLES OF COSTS 



111 



0.50 


















































































/ 






























/ 


/ 














0.40 
















/ 




























/ 






























/ 






























/ 


/ 


























A 


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COSTS in CALIFORNIA by YEARS. 








< 


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1914 1915 1916 1917 1918 1919 1920 1951 

Fig. 15. 



112 



COST OF PRODUCING OIL 



tt.ou 
































1 1 1 M 1 1 1 1 1 1 1 M 1 1 1 1 1 1 1 1 1 




































EFFECT of VOLUME of PRODUCTION per WELL 

on 

THE COST of PRODUCTION in CALIFORNIA 


= 




















































































































































































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Under 5,000 10,000 25,000 Over 

5,000 to to to 100.000 

'^' 10,000 25,000 100,000 ^""'""" 

Fig. 16. 



$ 




COST of DRILLING 


a 2500 FOOT WELL 






















in tne 

MID-CONTINENT FTFJ.O. 

1913 t£» 1921 

After ISIid- Continent Oil and Gas Association 






















/ 


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1913 ]914 1915 1916 1917 1918 1919 1950 1921 

Fig. 17, 



DRILLING COSTS 113 

Drilling Costs. — Drilling costs are composed of elements which 
vary widely, not only with the depth of the well, but also with the 
difficulties encountered. The principal items of drilling cost are as 
follows: 

1. Drilling rig. 

2. Dril ing contract. 

3. Casing. 

4. Fuel and water. 

5. Pumping equipment. 

6. Miscellaneous labor and supplies. 

The cost of the rig depends partly upon the probable depth of 
the well and partly upon the accessibility of the location. The cost 
of the drilling depends not only upon the depth, but also upon the 
underground difficulties that are to be expected. The cost of casing 
is a large item, and is subject to great variation: one well may re- 
quire complete casing of the strongest type; in another, the walls 
of the hole may stand up well, with few water sands to be penetrated, 
and so may require little casing. In some cases an adequate fuel and 
water supply can only be secured by expensive transportation. The 
cost of pumping equipment depends largely upon the depth of the 
well, but that of incidental labor and supplies may vary greatly under 
different conditions. 

The costs of drilling, like the costs of operating, increased greatly 
from 1915 to 1919 inclusive. Figure 17^ shows changes in cost of 
drilling an average 2500-foot well in Oklahoma during the years 1913 
to 1921, and an analysis of the components of those costs. Figure 
18^ gives changes in the costs of 6f-inch casing and 2-inch tubing, 
chosen as representative materials in the equipment of a well. 

Figure 19 gives changes in prices of materials and suppHes in Cali- 
fornia from 1914 to 1920. 

^ After table by Mid-Continent Oil & Gas Association in National Petroleum 
News, February 22, 1922, p. 28. 

2 After Bates and Lasky, Statistical Review of the Mid-Continent Field, from 
1912 to 1920 inclusive, National Petroleum News, March 30, 1921, 



114 



COST OF PRODUCING OIL 



$ 






PRICES of CASING & TUBING 
in 
















i.yo 






OKLAHOMA 

After Bates & Lasky 
















1.70 
1.60 
1.50 
1.40 
1.30 
1.20 
1.10 














/ 


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\ 


























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1915 



1316 



1917 



1918 

Fig. 18. 



1951 



\ 



DRILLING COSTS 



115 



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DRILLING COSTS 117 

The following are average costs of drilling and equipping wells 
at the end of 1921i. 

BURBANK POOL, OSAGE COUNTY, OKLAHOMA 
December, 1921 

Total depth of well, 2843 feet. Standard method. 

Standard rig complete $4,000.00 

DriUing contract @ $4.50 per foot 12,793.50 

Teaming material to location 2,863.00 

Trucking and freight 1,384.00 

Miscellaneous equipment 608.00 

2248 ft. 8i-inch casing, 28 lb 4,518.48 

2800 ft. 6|-mch casing, 24 lb 4,700.00 

Labor 5,365.00 

Fuel 1,485.00 

Water 785.00 

Initial shot 550.00 

Allowances for unforeseen accidents 3,000.00 

Total $42,051.98 

Salvage of an oU. well 3,500.00 

^-^et cost of oil well 38,551.98 

^^ Additional salvage if dry hole 10.500.00 

Net cost of dry hole $28,051.98 

OKMULGEE COUNTY, OKLAHOMA 
December, 1921 

Total depth of well, 2925 feet. Standard method. 

Standard rig complete $2,500.00 

Repairs to rig during driUing 350.00 

Drilling contract @ $2.25 per foot 6,581.25 

Roustabout labor and slush pit 500.00 

Teaming 100 tons to location 850.00 

55 ft. 121-inch casing, 50 lb 138.05 

500 ft. 10-inch casing, 40 lb 1,005.00 

1900 ft. 8^inch casing, 28 lb 2,603.00 

2400 ft. 6f-inch casing, 24 lb 2,644.00 

2900 ft. 5T\-inch casing, 17 lb 2,241.00 

250 bbl. water tank 310.00 

1000 ft. 2-inch water hne 227.00 

1320 ft. 2-mch gas Hne 264.00 

Water 350.00 

Fuel 875.00 

Shot 500.00 

1 Oil Weekly. Statistical Number. Jan. 21, 1922, p. 54. 



118 COST OF PRODUCING OIL 

Installation of individual pumping outfit 3,600.00 

Allowances for unforeseen accidents 7,000.00 

Total $32,558.30 

Salvage of an oil well 2,500.00 



^et cost of an oil well $30,058.30 

•Additional salvage if dry hole 11,000.00 



Net cost of dry hole 19,058.30 

Plugging dry hole 800.00 

Total cost of dry hole 19,858.30 

The following is the itemized cost of equipping a 2700-foot well 
for pumping in the Deaner pool, Okfuskee County, Oklahoma, in 
1921.1 

Tubing 2i inch, 4| lb., 2700 ft., @ 0.30^ $810.00 

Sucker rods | inch, 2650 ft., @ $7.75 per 100 ft 205.37 

Flow tank (200 bbls.) 375.00 

Two steel storage tanks (250 bbls.) 900.00 

Lead Unes to oil tanks, 200 ft. of 3-inch (used tubing).. , 60.00 

Miscellaneous pumping equipment 120.00 

Gas engine, installed 1,600.00 

Total $4,070.37 

Other costs, as of Dec. 1921, are as follows:^ 

FOX BUSH POOL, BUTLER COUNTY, KANSAS 
December, 1921 

Total depth, 2800 feet. Standard method. 

Standard rig complete $2,100.00 

Repairs to rig while drilling 100.00 

DrilHng contract @ $2.00 per foot 5,600.00 

Roustabout labor and slush pit 500.00 

Teaming 122 tons of material to location 640.50 

40 ft. 15|-inch casing, 70 lb 177.60 

330 ft. 12i-inch casing, 50 lb 874.50 

660 ft. 10-inch casing, 40 lb 1,272.00 

775 ft. 10-inch casing, 35 lb 1,433.75 

1869 ft. 8i-inch casing, 28 lb 2,853.60 

2509 ft. 6|-inch casing, 24 lb 2,960.60 

2769 ft. 5xVinch casing, 17 lb 2,319.03 

^ Kirwan, M. J. and Schwarzenbek, L. X., Petroleum Engineering in the Deaner 
Oil Field, Okfuskee County, Oklahoma, U. S. Bureau of Mines, July, 1921. 
2 Oil Weekly, Jan. 21, 1922, pp. 57 and 60. 



DRILLING COSTS 119 

One 250-bbl. water tank 245.00 

500 ft. 2-inch water line @ S0.19f per ft 98.75 

500 ft. 2-inch gas hne @ $0.17f per ft 88.75 

Water 147.00 

Fuel 980.00 

Shot 359.00 

Installation individual pumping outfit (including tubing 

rods, engine, belt and settling) 3,199.28 

Allowance for unforeseen expenses 400.00 

Total $26,349.36 

Salvage of an oil well 4,957.59 

k^et cost of an oil well $21,391.77 

■Additional salvage if dry hole 10,965.74 

Cost of plugging 640.00 

Net cost of dry hole 11,066.03 

WICHITA COUNTY, TEXAS 
December, 1921 

Total depth, 500 feet. Portable rig 

Slush pit $25.00 

Drilling, 500 ft. @ $1.50 per ft. with portable drilHng 

machine furnished complete by contractor 750.00 

Fuel and water 

Motor fuel for engine power $25.00 

Water service 75.00 

500 ft. 6t-mch 17-lb. casing 425.00 

Freight, hauling and miscellaneous expense 25.00 

Tubing, rods, jack and miscellaneous connection neces- 
sary to hook up completed well to central power 

plant 200.00 



Total $1,525.00 

STEPHENS AND YOUNG COUNTIES, TEXAS 
December, 1921 

Total depth 3400 ft. Standard method. 

84 X 22 ft. sway-braced standard rig with 6-inch Ideal 

rig irons, California pattern $3,000.00 

Drilling 3400 ft. hole by contract @ $4.25 per ft 14,450.00 

Fuel and water 

75 days' gas at $15 per day 1,125.00 

75 days' water service @ $10 per day 750.00 

Freight and hauling 2,500.00 

Tanks, flow lines, etc 2,500.00 



120 COST OF PRODUCING OIL 

300 ft. 20-iiich casing, 90 lb 1,780.00 

500 ft. 15|-inch casing, 70 lb 2,160.00 

1000 ft. 12A-inch casing, 50 lb 3,000.00 

1750 ft. 10-inch casing, 40 lb 3,580.00 

2600 ft. 8i-inch casing, 32 lb 4,180.00 

3100 ft. 6f-inch casing, 24 lb 3,525.00 

3400 ft. 5T\-inch casing, 17 lb 2,680.00 

100-quart shot nitroglycerin 350.00 

Add 10 per cent for unforeseen expenses 4,558.00 

Total $50,138.00 

Estimated salvage of an oil well 7,890.00 

/\Net cost of an oil well $42,248.00 

;, Additional salvage if dry hole $7,775.00 

Net cost of dry hole 34,473.00 

TEXAS GULF COAST 
December, 1921 

A minimum estimate for a 3500 foot Gulf Coast well is as follows : — 
Total depth 3500 ft. Rotary method. 

Derrick, 112 ft., complete 2,500.00 

Drilling 

90 days at $75 per day , 6,750.00 

500 ft. 12^inch casing, @ $3.50 1,750.00 

3000 ft. 8i-inch casing, @ $2.00 6,000.00 

3500 ft. 6i-inch casing, @ $1.65 5,775.00 

300 ft. 4f-inch hnes, @ $1.25 374.00 

100 ft. 4f-inch strainer, @ $3.00 300.00 

Packers, valves, etc 150.00 

21,100.00 

90 days' fuel 4,050.00 

Water 250.00 

Teaming 1,500.00 

Rig repairs 1,000.00 

Camp expense 1,350.00 

Cost of completed weU $31,850.00 

In this field, however, the nature of the formations, and the caving 

and other difficulties that may be encountered in the drilling cannot 

be so well foretold and provided for as in other fields. Furthermore, 

the difficulties are often sufficient to increase the cost of drilling 
enormously. One important well in 1920 cost $250,000. The above 
itemized cost is therefore a minimum estimate. 






DRILLING COSTS 121 

MEXIA, TEXAS 

December, 1921 
Total depth 3000 ft. Rotary method. 

Derrick, 112 ft., complete $2,500.00 

Drilling 

60 days @ $75 per day $4,500.00 

300 ft. lO-inch casing, @ $1.63 490.00 

300 ft. 6|-inch casing, @ $1.22 3,660.00 

Packers, valves, etc 750.00 

9,100.00 

Fuel, 60 days 6,000.00 

Water 2,000.00 

Teaming 1,000.00 

Rig repairs 1,000.00 

Camp expense 900.00 

Cost of completed well $22,500.00 

HAYNESVILLE, LOUISIANA 
December, 1921 

Total depth 2700 ft. Rotary method. 

Derrick complete $1,200.00 

Drilling 

60 days at $75 per day 4,500.00 

300 ft. 10-inch casing @ $1.53 460.00 

2700 ft. 6-inch casing @ $1.07 2,890.00 

Packers, valves, etc 750.00 

8,600.00 

Fuel $2,700.00 

Water $20 per day 1,200.00 

Teaming 800.00 

Rig repairs 1,000.00 

Camp expense 250.00 

Total cost of completed well $15,750.00 

KERN COUNTY, CALIFORNIA 
December, 1921 
Total depth 2000 ft. Standard method. 

Cost of rig complete 6,000.00 

Casing and tubing 13,500.00 

Labor, or drilling cost 9,000.00 

Fuel and water 1,800.00 

Tankage and pumping equipment 6,000.00 



122 COST OF PRODUCING OIL 

Drayage 1,500.00 

Margin for accidents 2,000.00 

Estimated total cost $39,800.00 

MEXICO 

A well in the Panuco field costs between $40,000 and $50,000, and 
a well in the southern fields about twice that amount. A wildcat 
well in Mexico costs $125,000 to $150,000 on the average, according 
to its distance from good roads. 

In exceptional cases wildcat wells have cost as much as $500,000. 



CHAPTER XV 
COST ACCOUNTING 

The purpose of cost accounting is to analyze in detail the expenses 
of each step or process incurred in the making or procuring of a prod- 
uct. Whether the output is steel rails, felt hats, copper wire, auto- 
mobiles, oil or gas, the responsibility of cost accounting remains the 
same. The information must be so elaborate and so detailed as to 
specify the cost of each factor involved in the making of a standard 
unit of the product, i.e., the cost of the factors that make a ton of 
steel rails, a gross of felt hats or a barrel of oil. An illustration may 
make this clearer. 

The total '' Labor Costs " for a certain oil company, covering a 
month's production of 3182 barrels was $2865.10, or an average unit 
labor cost of 90 cents per barrel. The labor costs were divided under 
seven different heads, as shown in the following cost table: 



June, 1919 



MONTHLY LABOR COST ANALYSIS 

Production, 3182 Barrels 



Occupation 


Cost 


Cost per Barrel 


(1) Labor Pumping Wells 


$834.31 
124.17 
501.00 
310.62 
800.00 
95.00 
200.00 


.263 


(2) " Repairing Wells 


.039 


(3) " Cleaning Wells 


.157 


(4) '' Redrilling Wells 


.097 


(5) " Supervision 


.251 


(6) '' Gen'l Property Work 

(7) " Storing and Shipping 


.03 
.063 







Total Labor Costs $2,865.10 

Total Labor Costs per Barrel Produced , . . 



.90 



Such a report presents in detail the occupational labor costs for 
producing a barrel of oil, the unit in this industry, for a given month. 
Reports of this nature, compiled not only for labor, but also for ma- 
terials, and for overhead expenses, such as administration, depletion 
and depreciation, bring various marked advantages to the manage- 
ment and to the industry as a whole. 

123 



124 COST ACCOUNTING 

It is the purpose of this chapter to point out specifically the ad- 
vantages that come with carefully determined costs and to set forth 
briefly a survey of the methods for compiling cost data. 

Advantages of Cost Accounting. — The following five advantages 
are the more important contributions that cost accounting makes 
to the oil-producing industry. 

(1) Accurate Costs are Related to Efficient Operation. — This fact 
is being realized more and more by the progressive oil producer. If 
efficient operation is defined as that which yields a maximum of out- 
put with a minimum of cost, it is evident that such operation can only 
be secured by having a constant analysis and study made of every sig- 
nificant item of expenditure. Such analysis makes possible com- 
parisons with similar costs of previous periods, and also with costs of 
other projects carried on at the same time. 

The manager who has installed a simple but effective cost system 
will soon look upon it as an investment from which he expects returns; 
he will view it as he views an improved piece of machinery. It 
produces returns because it points to weaknesses of operation that 
should be corrected, and to strong points that should be further 
developed. 

(2) Cost Accounting Eliminates Wastes. — Slipshod methods of 
operation, careless handling of tools, needless destruction and loss 
of materials and supplies can be checked in part by having all of these 
elements regularly, accurately and definitely measured; but respon- 
sibility for such malpractices must be localized. The average in- 
dividual does not really attempt to reach the goal that is set for 
him until he is made definitely responsible for high-grade, standard 
work. 

Probably there is no greater compensation in maintaining a 
system of accounting than the locating and measuring of waste. For 
instance, a certain company carried an inventory of supplies and tools 
valued at about $78,000; yet it so ignored the negligence of its em- 
ployees in the handling of the material assets, that it had to make an 
inventory adjustment figure as high as 35 per cent, at the end of the 
semi-annual period, in order to adjust the actual value of the material 
assets to the value as given in the books. It was a cost analysis 
that brought the trouble to light. First, no one person had been 
made fully responsible for the safe-keeping of the supplies, with the 
result that thievery and losses through carelessness were common. 
Again, in the doling out of supplies, careless counts and measure- 



ADVANTAGES OF COST ACCOUNTING 125 

ments had been made. Where the requisition called for 150 feet of 
rope, the supply clerk, instead of measuring off this length, had 
made a generous guess and cut off 160 feet or perhaps 200 feet. Fur- 
thermore, the supplies and stores were so recklessly and carelessly 
handled that the loss caused by wind, rain, and breakage ran unneces- 
sarily high. However, conditions became very different when one 
individual was held accountable monthly for all the supphes, and 
was compelled to keep accurate stock records of each item of ma- 
terials. 

In every concern, leaks are bound to occur; no company is im- 
mune to them. But if costs are kept, showing the expenditures in 
each operation, an increase in the cost of any item is quickly re- 
vealed by comparisons, and the executive is in a position to take up the 
matter for investigation. 

(3) Government Requirements Demand Cost Records. — In con- 
sidering depreciation and depletion in Chapter XVI, emphasis was 
placed upon the importance of these elements of costs from the 
standpoint of taxation. Unless properly determined costs are shown, 
not only for depletion and depreciation but for every form of cost, 
the management invites required revisions that make both trouble 
and needless expense. Taxes on profits are determined directly by 
costs, and unless costs are accurately determined, much trouble is 
experienced in ascertaining the true amount of taxes. Some of the 
expense of securing professional accountants could be reduced, and 
in some cases eliminated, if costs were kept in an intelligent manner 
by the company which is making up its tax returns. 

(4) Large-Scale Production Calls for Cost Methods. — Most pro- 
ducing companies have grown to such size that the personal super- 
vision formerly exercised by the chief executives has become prac- 
tically impossible. The only reliable and scientific way whereby the 
modern management can measure and judge the many and varied 
operations of the organization is through a system of comparative 
quantitative reports. 

The office of one fairly large company has its walls literally cov- 
ered with charts and graphs covering its operations. Some of these 
data had their source in the operation of a comparatively simple but 
efficient cost-accounting system. 

(5) Sel ing Prices Are Related to Costs. — The success of a com- 
pany's operations is measured by the size of the margin between cost 
and selling price, i.e., by profits. In the earlier stages of oil produc- 



126 COST ACCOUNTING 

tion, margins were no doubt larger per dollar invested than they are 
today. A company was " made or broken " by the success or fail- 
ure of a few wells. Today, with an ever-increasing proportion of 
old wells and with the installation of additional machinery for more 
complete extraction, a closer margin prevails, and greater attention 
to costs becomes appropriate. 

The annals of the oil industry are filled with records of companies 
long since dead, which, during the first few years when production per 
well was high, made attractive reports to their stock-holders regarding 
their output and sales. But neglect to provide for the replacing of 
the dying investment through depletion costs led to their extinction. 

The costs of producing oil go on whether they are measured or 
not. Unless they are measured, recorded and used, there is danger 
that the investor will be deceived by glowing accounts of sales and 
apparent profits, while in reality, sufficient provision for costs, which 
are indirect and hidden, has not been made. Such costs, however, 
are just as real and demand just as careful consideration as any 
other form of expenditure. Being hidden, they must be watched for 
more closely. 

Principles and Methods of Compiling Costs. — The definite prob- 
lem in providing a simple and effective cost system is to ascertain the 
amount of money which has been expended for materials, labor and 
expense in the development of a definite operation or undertaking. 

During the last fifteen years much attention has been given, 
by the leading accountants and engineers in this country, to the 
development of methods which will give these results to the pro- 
ducer with the least amount of effort and expense. Only a brief 
outline of the general principles for compiling can be set forth in this 
chapter. The reader will find Bulletin 194 of the United States 
Bureau of Mines, entitled " Cost Accounting for Oil Producers," 
and the Report on the California and Wyoming Oil Industry by the 
Federal Trade Commission helpful. 

Only the four most important divisions of a cost system for oil 
production are given here. These, however, form the basis from 
which most costs can readily be obtained. They are, 

1. The voucher register; 

2. Accounting for sales and material; 

3. Accounting for expenses; 

4. Cost statements. 



PRINCIPLES AND METHODS OF COMPILING COSTS 127 

These four divisions of a cost-accounting system must be looked 
upon as additions to the regular operation of the balance sheet and 
the profit and loss statements. (See Chapter XIII, on The Annual 
Report for a discussion of the balance sheet, and the profit and loss 
statement.) 

(1) The Voucher Register. — The accounting principles involved 
in the operation of a voucher register are not difficult to understand. 
When every cent of money spent by the company is vouched for in 
writing by someone in authority, and is then listed on specially pre- 
pared forms, a classification is obtained for all expenditures made. 
A sheet which lists and classifies every voucher paid out by the com- 
pany is called a voucher register. It is not desirable in large com- 
panies to require the signature of any one official to all vouchers. The 
work should be so divided that the approval is not merely a matter 
of form, but has a significance. 

The form on the following page gives a simple voucher register used 
by smaller concerns. 

Such a voucher register is capable of carrying an almost endless 
number of columns to meet individual needs. Each company or- 
ganizes its forms according to the specific analysis it may desire. 

In the larger concerns, the number of columns in the voucher 
register is reduced to three or four. These columns then act only as 
control figures, which refer to supplementary sheets giving the de- 
tailed information. 

(2) Accounting for Material and Labor. — There are two kinds of 
costs that must be analyzed in every enterprise — costs of labor and 
costs of materials. 

In the handling of payrolls, it is customary to put a voucher 
through the voucher register which changes the total payroll to a 
'' Payroll Account." This account acts as a controlling account 
covering the payroll distribution sheets.^ The amounts spent for 
labor can thus be analyzed with ease, and divided according to specific 
occupations, such as teaming, drilling, cleaning, repairing, etc. 

The distribution of material costs is somewhat more difficult 
than that of labor costs. The difficulty occurs because materials 
are purchased at one period and often carried in stock (inventory), 
for an indefinite time before they are used. Hence a material and 
supply account should be kept, to record the stocks on hand. This 

^ See Chapter VIII of " Cost Accounting for Oil Producers, " U. S. Bureau of 
Mines Bulletin 158, pages 54-58, for various forms of payrolls. 



128 



COST ACCOUNTING 







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PRINCIPLES AND METHODS OF COMPILING COSTS 129 

" Warehouse " account is charged with materials when purchased, 
usually on the voucher register; it is a controlling account like pay- 
rolls, and is supported by the record sheets of the warehouse. When 
the warehouse gives out materials, the field clerk deducts from the 
stock record the units of material given out, prices them, and carries 
the information to his record sheet. At the end of the month his re- 
port will show the amount of supplies on hand and the amounts 
charged to the different operations. 

Accounting forms for material recording^ are also found in Chap- 
ter VIII of '' Cost Accounting for Oil Producers," referred to above. 

(3) Accounting Expenses. — Besides the material and labor costs, 
cost accounting must measure the indirect charges and adminis- 
trative expenses, such as rent, salaries, stationery, telephones, post- 
age, etc. Two other elements, depletion'and depreciation, are treated 
as costs, as are also taxes and insurance. 

Only of late years have depletion and depreciation received the 
consideration due them as cost elements. The authors have con- 
sidered these elements of cost so important as to warrant their treat- 
ment in a special chapter devoted to that subject. 

All indirect or administrative expenses may be handled through 
the voucher register by having appropriate column titles. Care 
must be taken to redistribute such charges for the specific periods of 
time for which costs are being calculated. 

(4) Cost Statements. — Any oil company whose accounting system 
includes a voucher register and an analysis of payrolls and warehouse 
disbursements and gives proper regard to its administrative ex- 
penses and overhead costs, has the means of making monthly cost 
statements for the management. Considerable variety in state- 
ments of cost is possible, provided the proper accounting data have 
been recorded throughout the month. The important responsi- 
bihty that rests upon the cost accountant is so to arrange his cost 
system as to be able to make out such statements as are useful to the 
management. The cost represents the summarized information 
which the executive uses as a basis for forming his judgments. 

The two statement forms which follow are typical, and suggest 
the type and kind of information that the management may receive 
from its accounting system. 

^ See also Report of Committee on Uniform Accounting of the Natural Gas Asso- 
ciation, Oliver Building, Pittsburgh, Pa. 



130 



COST ACCOUNTING 



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PRINCIPLES AND METHODS OF COMPILING COSTS 131 



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CHAPTER XVI 
DEPRECIATION AND DEPLETION 

There are three definite influences which cause changes in the 
value of the assets of oil and gas companies : fluctuation, depreciation 
and depletion. Fluctuation is due to market conditions and arises 
from causes entirely outside the control of the operating company. 
One might define fluctuation as a changing of valuation due to market 
influences. 

Depreciation and depletion, in contrast, bear no direct relation 
to outside market conditions. Depreciation may be defined as the 
decline in the value of physical assets, such as tools, machinery, equip- 
ment, pipe lines, tanks etc. 

Depletion may be defined as the decline in the value of the property 
caused by the extraction of oil from such property. 

The important thing to remember about depreciation and depletion 
is that they are costs of operating the business, and they must be treated 
as such if the true condition of an enterprise is to be determined. 
The investor should beware of flowery statements concerning large 
profits, which make no allowance for the inevitable costs of depre- 
ciation and depletion. It should be seen that an accounting system 
which does not provide for these two factors of cost cannot give a 
true profit and loss statement. In its inflated profits are embodied 
losses of plant and oil value which have not been deducted as they 
should have been. The courts uphold the truth of the contention 
that depreciation and depletion are elements of cost. The decision 
in the Knoxville Case,^ which has been looked upon as the leading 
case of this kind, states that: 

" Before coming to the question of profit at all, the company i£ 
entitled to earn a sufficient sum annually to provide, not only for the 
current repairs, but for making good the depreciation and replacing 
the parts of the property when they come to the end of their life. 
It is entitled to see that from earnings the value of the property invested 
is kept unimpaired so that at the end of any given term of years the 

1 212 U. S. I. 
132 



« 



DEPRECIATION 133 

original investment remains as it was at the beginning." (Under- 
scoring by the authors.) 

Not only for getting a true picture of the financial condition of the 
oil company, but also for tax purposes, depreciation and depletion 
must be considered. It is only within the last year or two that oil 
companies have begun to take into account upon their books the two 
items of depreciation and depletion. Under the Federal Income 
Tax Law now in force, depreciation and depletion are deductible from 
gross income, in order to ascertain the net income which is taxable. 
Phis makes it imperative for oil and gas companies to provide for these 
items on their books, in order that they may determine the correct 
amount of their tax. 

Inasmuch as depreciation covers the falling off in value of tools 
and equipment, and depletion the falling off in the value of the oil 
property due to extractions, each will be treated separately and in 
detail. 

Depreciation. — Depreciation is the lessening in value of assets 
used in the business, and is the inevitable consequence of wear and 
tear and of the lapse of time. In the oil industry, depreciation is 
considered to include the decline in value of all fixed assets, with the 
exception of leaseholds and real estate. Such assets include build- 
ings, well equipment, tanks, pipe lines and all other physical property 
which is used in the business and is not held for the purpose of resale. 

This gradual diminution in value and usefulness of fixed assets 
should properly be recognized in the books of account, although many 
oil companies did not make adequate provision for it until income tax 
regulations compelled closer scrutiny. This loss in value is a cost of 
business, just as much as labor, pumping, teaming or any other cost. 
The purpose of recognizing it is to spread the cost of an asset over the 
accounting periods of its usefulness. If this were not done, the whole 
cost of the asset would appear as an expense of the last accounting 
period when it finally proves unserviceable. This is contrary to one 
of the fundamental principles of accounting. 

Depreciation may be due to one or more of the following causes: 

1. Wear and tear, consequent upon use. 

2. Deterioration due to the passage of time and exposure to the 

elements. 

3. Obsolescence, as parts of the plant become useless when sup- 

planted by improved devices. 



134 DEPRECIATION AND DEPLETION 

4. Inadequacy, as parts of the plant become inefficient because 

they are not large enough for the increased demand. 

5. Accident, especially fire from lightning and prairie fires. 

The causes of decrease in value, given above, resolve themselves 
into two classes. One class, in which fall the first two, consists of 
those items which can be controlled and planned for; the other com- 
prises those items which are uncontrollable and which, for the most 
part, cannot be foreseen. Under this latter head fall the last three 
causes of depreciation. 

The proper method of booking depreciation is to charge the amount 
to an expense account, which may be called simply '' Depreciation," 
and either to credit the asset account with the same figure, or, still 
better, to credit a valuation account termed '' Reserve for Depre- 
ciation." This keeps the value of the asset on the books at its original 
cost or value, and on the balance sheet the valuation account is sub- 
tracted from the book value in an inside column and the net amount 
is extended into the asset column, in order to show the estimated 
present value of the asset in question. 

When the rate of depreciation has been determined, a charge is 
made to the Depreciation account and a credit of the same amount 
to the Reserve for Depreciation at the end of every accounting period. 
When the asset is finally disposed of, the asset account is credited and 
the surplus account is debited. The amount received for the asset 
as scrap or salvage is also credited to the asset account, either directly 
or through the valuation account, and any small balance which re- 
mains standing on the books as an asset should be disposed of as a 
charge to Depreciation for the current period. 

The amount of depreciation to be charged off must depend upon: 

1. The original value of the asset. 

2. The residual or scrap value of the asset. 

3. The ordinary life of the asset. 

Of the above factors used to determine the rate of depreciation, the 
original value, or purchase cost, of the asset is known, and the residual 
or scrap value may be foretold with a fair degree of accuracy. The 
length of life of the asset, however, is the most difficult to determine, 
as it is dependent upon so many different factors, such as the nature 
of the asset, its use and surroundings, the climate, etc., but the life 
must be estimated as nearly as possible. To aid in such estimates, 
records of life of the various assets in the company's own practice 



DEPRECIATION 



135 



should be definitely recorded as the data accumulate. In the case of 
well equipment, it is considered good practice to depreciate it accord- 
ing to the estimated life of the average well, making allowance, of 
course, for salvage. 

It is not the authors' purpose to go into detail here in regard to the 
lifferent rates of depreciation on the different types of property used 
in the oil business, but, inasmuch as the rates of depreciation vary 
for the different classes of property, and as the Income Tax Law 
requires that the different types of property be depreciated according 
to different rates, it is suggested that the physical property be classi- 
fied as follows for depreciation purposes: 



1. Drilling equipment 

2. Well equipment 

3. Dehydrators 

4. Tanks 

5. Tools 

6. Transportation equipment 



7. Water plants 

8. Electric equipment 

9. Machine shop 

10. Buildings 

11. Pipe lines 

12. Refineries 



13. Sales or marketing equipment. 

Suggested lengths of life of these items and others have been pro- 
posed in the Manual of the Oil and Gas Industry pubKshed by the 
Treasury Department for the information of taxpayers. 



$100 



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at end of Year 




STRAIGHT LINE DEPRECIATION 
















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9 10 11 12 13 14 15 
Years 

Fig. 20. 



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After the accountant, from his knowledge of the original value or 
cost and the probable scrap or salvage value, has estimated the prob- 
able life of the depreciable property in question, it is his duty to book 



136 DEPRECIATION AND DEPLETION 

the depreciation from year to year according to one of the widely 
accepted depreciation methods. The best-known method of de- 
preciation is that called the straight-line method. It s so called 
because it employs a straight descending line as a graphical repre- 
sentation of the depreciated value of the asset from year to year. 
By the straight-line method (Fig. 20) , the total amount to be charged 
off is distributed equally to each of the accounting periods. This 
is the method the authors would recommend for use in the oil business, 
more because of its simplicity and wide use than for any theoretical 
advantage over other methods, which are more complicated when 
applied to the oil business. 

Depletion. — Depletion, as has been noted, is the decline in 
value of the investment in an oil property caused by the exhaustion 
of the recoverable oil. Only of recent years has it been realized that 
this decline in value should be taken into consideration on the books 
as an expense, just as an allowance is made for depreciation. If 
depletion were not so considered and booked, the net profit for each 
period would include some of the capital which had been invested in 
the oil properties. Therefore, in order to keep the original investment 
intact and to provide for the development of new properties, as ex- 
haustion of the properties now operated inevitably ensues, a Reserve 
for Depletion should be set up on the books. 

The method for booking depletion is the same as that for deprecia- 
tion. The estimated amount of depletion sustained during the year 
is charged to an expense account called the Depletion account, and 
the same amount is credited to a surplus account called Reserve 
for Depletion. On the balance sheet this valuation account should be 
deducted from Operated Leases account in an inside column, in order 
to show the net present value of the operated leases. 

The amount of depletion to be charged off during the year depends 
upon the production during the year as compared with the total 
amount of recoverable oil under the property at the beginning of the 
year. The production is a known quantity, and the problem of esti- 
mating depletion resolves itself into the determination of the re- 
coverable underground supply. Accurate calculations of under- 
ground oil are impossible, but where proper records of a developed 
property or district have been kept, reasonably reliable estimates 
may be made. These estimates are less reliable in proportion to the 
lack of development or the lack of proper records. 

The Income Tax Law of 1918 specifically provides that accounts 



DEPLETION 137 

for depletion shall be carried on the books of every oil company claim- 
ing a depletion allowance as a deduction from gross income, in order 
to ascertain the amount of net income which is taxable. As most 
oil companies had failed, up to this time, to take depletion into ac- 
count on their books, any depletion accounts must be made consistent 
with this law as long as it remains in force. 

The law provides that the deduction allowable for depletion shall 
be based on the following: 

(a) Upon cost, if acquired after February 28, 1913; or 

(b) Upon the fair market value as of March 1, 1913, if acquired 

prior thereto; or 

(c) Upon the fair market value within thirty days of discovery, 

in the case of oil wells '' discovered " by taxpayer after Feb- 
ruary 28, 1913, where the fair market value is dispro- 
portionate to cost. 

The amounts from (b) and (c) are called the capital sum and must be 
set up separately, in the case of oil, for each tract or lease. This capital 
sum, depleted down to the beginning of the year, is divided by the future 
estimated production for the tract or lease, and gives what is called 
the unit cost. This unit cost, multiplied by the number of barrels 
of oil produced during the year, gives the amount of depletion sus- 
tained during the year. The total of all these figures, for all of the 
leases for which a capital sum has been set up, gives the total deple- 
tion sustained, which is deductible from gross income. 

According to the law, oil depletion must be calculated upon the 
individual tract or lease. It is therefore necessary, in order to arrive 
at a reasonable depletion figure, that accurate records be kept for 
each lease. In the calculation of depletion, many difficulties are 
met on account of incomplete and unsatisfactory records. Some 
record forms that will enable any oil company to have its depletion 
calculated more accurately and more quickly are given as Fig. 21. 

First, a separate record of the cost of each individual lease should 
be kept, as this is the amount to be set up as capital sum for that 
lease, providing the same was acquired after February 28, 1913. 
This cost should include the original bonus or cash paid for the lease, 
as this represents the cost of the oil under the property, any expenses 
incurred in acquiring the property, and any costs of development, 
provided that all of these have been charged to investment accounts 
and not to expense accounts. 







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DEPLETION 139 

Article 216 of Regulation 45, relating to the Income Tax Law of 
1918, provides that every taxpayer claiming and making a deduction 
for depletion in the case of an oil property shall keep accurate ledger 
accounts in which shall be charged the fair market value as of March 
1, 1913, or within thirty days after the date of discovery, or the cost, 
as the case may be, of the oil and gas contents of the property, to- 
gether with such amounts expended for development as have not 
been charged to expense. These accounts shall be credited with the 
amount of depletion claimed and allowed, so that when the sum of 
the credits for depletion equals the value or cost of the property plus 
the amount added thereto for development, no further deduction for 
depletion with respect to that property will be allowed, except as 
additional cost, other than expense, is incurred. 

Whether the cost referred to in the above article should include, 
in addition to the bonus or cash paid for the lease and any expenses 
incurred in acquiring the lease, the cost of drilling and other de- 
velopment costs, depends on whether it is the practice of the company 
to charge these to Operated Leases account or to some other capital 
account, or to expense account. According to the law, the taxpayer 
may charge these items either to expense or to investment, but which- 
ever system is adopted must be followed consistently thereafter. 

To comply strictly with the provisions of this article, the use of a 
subsidiary ledger is desirable. This ledger may be called the Operated 
Leases Ledger or some other suitable name; the Operated Leases 
account in the general ledger will be the controlling account and will 
represent the value of all the operated leases. This Operated Leases 
ledger should contain an account for each operated lease charged 
with the capital sum set up for that lease; it is ruled as in Fig. 21 
so as to show the depleted value from year to year, while the control- 
ling account in the general ledger will be offset by the valuation ac- 
count. Reserve for Depletion. In this case, the Operated Lease 
ledger is represented by two accounts in the general ledger, and the 
total of the balances of the Operated Leases account less the balance 
of the Reserve for Depletion account. Thus, neither the Operated 
Leases account or its valuation account is a true control over the 
Operated Leases ledger. 

A monthly record of the cost of operating each lease, including its 
share of the general expense, should be kept. Such first-hand, recent, 
local data are very valuable in the appraisal of the wells. 

If it is at all feasible, accurate monthly production records should 



140 DEPRECIATION AND DEPLETION 

be kept for each individual well, as such records are useful in deter- 
mining the average rate of decline of the wells in any district, upon 
which the estimation of the future production of the wells in that 
district may be based. A record of individual well production is 
useful in proving discovery, as the fair market value, which is allowed 
to be set up as " capital sum " for the lease on account of the dis- 
covery, is dependent upon the first thirty days' production of a dis- 
covery well. For the appraisal of such a well, it is desirable to know 
the relation of this thirty days' production to that of the first 
year. 

When the lead lines from all of the wells on one property flow 
into one or two tanks, and new wells are coming in from time to time, 
it is not only impossible to measure the production of any one well, 
but it is difficult to estimate the average production of old wells as 
distinguished from the new. It is obvious that such facts constitute 
the vital statistics of a producing lease, and deductions made from 
them must govern the estimation of the future production of the prop- 
erty, the drilling of new wells, their spacing and location, and the 
rate and time of pumping individual wells. 

When there are but two or three wells on a lease, even though all 
flow into one tank, their individual daily or weekly production may 
be determined by pumping them intermittently and keeping a careful 
record of the tank gauges. This plan may also be followed in the 
measurement of flowing wells. A common method of estimating the 
production of individual wells is to compare the time required to 
" pump off " various wells, or the length of time of the flow at the tank 
end of the lead line. Where the wells all discharge into one tank, each 
by a separate lead line, this method may be resorted to if no better 
method is feasible. The motion of the pumping jack will give a 
rough indication of the time required to pump off, if the lead lines are 
not separate. 

More accurate results may be obtained by the use of a separate 
intermediate measuring tank. It is believed that the individual well 
production records obtained in this way will more than justify the 
cost of this extra tank on most leases having more than one well. 

A monthly record of the percentage decline of each individual well, 
or at least of the group delivering to one tank, should be kept, pref- 
erably as a graph. Such an accurate record of the decline of the 
wells on an oil property is considered absolutely essential by the care- 
ful operator or appraiser, in order that he may estimate the future 



SUMMARY 141 

recoverable oil, both as a basis for the valuation of the given property, 
and as an aid in valuing similar properties. 

There is one uncommon type of company or partnership which 
may well treat its depletion and depreciation by a different method. 
This is one organized for the express purpose of exploiting one prop- 
erty with the intention of liquidating at its abandonment. Here 
no reserve for depletion should be made, but the corresponding al- 
lowance should be calculated in order to obtain a deduction in the 
income tax, and it should then be issued as a special liquidating 
dividend. 

Summary. — The oil company should make a depreciation al- 
lowance and a depletion allowance in its books. On this reserve its 
future life, and so its continuity, depends. Without such a reserve a 
company may seem to be in good condition although the investment 
may never be amortized. The only exception is in the case of a com- 
pany or partnership formed merely for the purpose of developing one 
property. 



CHAPTER XVII 
TAXATION 

State Taxes. — The state taxation of oil-producing companies 
in various states is mainly on the basis of a percentage (usually 2 
to 3 per cent) of the value either of the year's production or else of 
the physical plant. It ignores the reserve of oil underground. Neither 
basis is just, from the standpoint of the economist, but each has the 
merit of ease, economy and relative certainty in fixing the tax. 

Federal Taxes. — The Federal tax, on the other hand, is an 
income tax, and while probably the most just, it is also a most diffi- 
cult tax to fix. In addition to income tax, a war profits and an ex- 
cess profits tax were assessed by the Act of 1918, but were omitted 
in the Act of 1921. 

To ascertain net income, deductions must be made from the gross 
receipts for the year. In this respect the producers of natural re- 
sources received special consideration because of the exhaustible 
nature of their assets. The return on the investment at the rate of 
recovery of the resource is provided for by a deduction for depletion. 
Primarily, deductions are based on the investment. Difficulty was 
encountered in attempting to fix all depletion deductions on invest- 
ment, because many companies obtained their holdings many years 
ago and for a nominal amount, prior to the inauguration of the in- 
come tax. Consequently, a deduction based on valuation of the 
resources, as of that date (March 1, 1913), was considered fair and 
reasonable. For the benefit of the operator who hazards large sums 
of money in opening up new pools, a clause permitting valuation with- 
in thirty days of discovery of a new pool or producing horizon was 
inserted in the Act of 1918. This was later interpreted to comply 
with decisions based on the mining laws and is now limited to 160- 
acre areas, this being the area allowed to a corporation, under the 
mining law, as claim for discovery. 

Depletion depends largely upon the valuation figures which must 
be prepared by the taxpayer and fully substantiated by him. The 
profit from sale of assets may likewise depend on a valuation. This, 

142 



PREPARATION OF TAX RETURNS 143 

unfortunately, is a difficult, technical matter, which calls for a careful 
preparation of reports and for a thorough understanding of appraisal 
methods and also of income tax procedure. 

Preparation of Tax Returns. — To prepare the tax return of an 
oil company, one should provide himself with the following litera- 
ture: 

1. A copy of the Act, which is Public Document No. 98, Sixty- 
seventh Congress. It may be had on application to a Congressman. 

2. Bureau of Mines Bulletins, No. 177 (30 cents), and No. 194 
(10 cents), to be obtained from the Superintendent of Documents, 
Washington, D. C. 

3. Regulations 33, 45 and 62 (edition with addenda) of the Treas- 
ury Department. 

4. Questionnaire for oil producers, of the Treasury Department. 
(The one current in January 1922 is called Form 0.) 

5. The Manual of the Oil and Gas Industry, revised August 1921, 
published by the Treasury Department (25 cents), but obtained from 
the Superintendent of Documents, Washington, D. C. An early 
printing of this edition has a commissioner's ruling, on page 45, which 
has since been deleted. 

6. Subscription to the Internal Revenue Bulletin, which is issued 
weekly. This is obtained from the Superintendent of Documents, 
Washington, D. C. ($2.00 a year). 

A copy of the oil and gas questionnaire is first obtained from the 
local Federal Tax Collector. The first schedules to be filled out are 
I, IV, VI, and VII. The remaining schedules are dependent upon 
these. Schedule I calls for the cost of the property at the time of 
acquisition. The blanks must be filled out separately for each pro- 
ducing lease. They offer little difficulty except when some of the 
data are not obtainable. When the bonus was merely nominal and 
other expenses were charged as such, and when one knows that the 
cost, though it could be ascertained, would not be large enough to 
warrant the search, one is justified in writing across a number of these 
entries '' cost only nominal and not claimed." Nearly every oil 
company has a number of abandoned leases, the whole cost of which 
is so low and always so difficult to ascertain that it is advisable merely 
to state that there have been such leases and that the costs were not 
large enough to warrant preparation of the data to claim the amount 
in the '' capital sum." 



144 TAXATION 

Valuation Schedule. — Schedules I\ , VI, and VII offer little 
difficulty, although they are time-consuming and lead up to the very 
difficult Schedule II. This is the valuation schedule and is made out 
for properties as of March 1, 1913, the date on which the Income 
Tax Law went into effect. The most obvious way to ascertain '' fair 
exchange value " is to cite sales of similar properties. If there was a 
sale of a truly similar property by a willing seller to a willing buyer, 
on the same date, it is an exact index of '' fair exchange value." 
But such sales are so extremely rare that it becomes a question of how 
dissimilar the properties may be and still permit the analogy to be 
drawn. The sale must have taken place at very nearly the same time, 
because the expectation of future price, and hence the tone of the 
market, changes from day to day. 

Analytic Appraisal. — When no sale sufficiently analogous can 
be found, one must resort to an analytic appraisal. The method 
recommended is to establish first a predicted price curve for what 
may reasonably have been expected, at the time of appraisal, to 
be the probable future prices at the well, as described in Chapter 
XXI. One must also calculate an advance in costs. From these, 
one may get an average expected profit per unit for each successive 
year in the future, until the abandonment of the well. 

The next task is to estimate the yield of the well in succeeding 
years. This estimate must be based on the analogy of those wells 
of known history that are most comparable. Only when analogous 
wells are not known, should the appraiser estimate the reserves by 
calculating the voids in the reservoir. This method is too faulty 
to use except in very rare cases. 

There are two methods for combining the records of many wells 
to make generalized curves which can be used to advantage. One, 
that of Lewis and Beal (Fig. 22), described in the Manual of the 
Oil and Gas Industry, ignores age or pressure, but can be employed 
when the data are too imperfect for the other method. The second 
method is the one presented by the senior author at the 1921 meeting 
of the American Association of Petroleum Geologists. By this 
method, the first year's production of all the wells is plotted against 
that of the second year, and a line is drawn through the points (Fig. 
23). The second year's production is then plotted against that of 
the third year, and so on. For a well of any size and any age, one can 
now read the probable production for the following year and so con- 
struct a decline curve (Fig. 24). 



ANALYTIC APPRAISAL 



145 



Thousand 

Barrels 

20000 



15000 



10000 



5000 



































































































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11 12 



16 17 



Fig. 22. — A composite decline curve made by Lewis and BeaFs 
"family curve" or shingling method. 



146 



TAXATION 



If the curve constructed by either method does not extend to the 
economic Hmit of production, it should be extrapolated to the hmit 
established. The methods employed for such an extrapolation are 
described in the Manual of the Oil and Gas Industry, previously cited. 

After the expected profits have been determined for each year by 
this method, the profits of each individual year are multiplied in turn 
by a compound discount factor for the year. None of the pub- 







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Production 


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Age Size Method 

of 

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Production 
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Fig. 23. 

lished '' present worth "or compound discount tables are adapted for 
this purpose, as they all start with a full year and assume that the 
money is not reahzed till the end of the year. It should be observed 
that, if the appraisal is of March 1, 1913, as so many are, the compound 
discount factors should be calculated on the basis that the average 
dollar is received at the middle of the period covered, i.e., at the end 
of five months in the first ten months' period in 1913, and at the end 
of each six months in the subsequent calendar year periods, if the 
production data are assembled by calendar years. If the data are 
available by months, year units of March 1 to March 1 may be em- 
ployed. The rate of compound discount that should be used is con- 
trolled by the degree of reluctance on the part of the investor to in- 
vest under the particular circumstances. To the sum of the discounted, 
future, expected profits add the discounted value of the eventual 
salvage, to get the full productive value of the well. 



ANALYTIC APPRAISAL 



147 



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Constructed by 






















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Fig. 24. 



148 TAXATION 

The buyers of oil properties are ordinarily unwilling, of course, 
to pay an amount equal to the full productive value expected. A 
further discount for the risk of the investment is therefore necessary in 
the appraisal of most properties. Moreover, in the valuation of undrilled 
acreage, the discount for risk is higher, and a further discount is neces- 
sary for deferment on account of loss of pressure from the opening of 
other wells. 

The questionnaire calls for the separate cost determination or 
valuation of every producing lease. Where a lease has more than 
one discovery claim, each must be valued separately. After the well 
or wells and their supporting acreage have been appraised, the re- 
maining acreage in the discovery area or lease should be given a per- 
centage of probability of its being found productive when drilled. 
The value of the productive acreage, as acreage, is multiplied by this 
probability, and, less deduction for reduction of pressure because of 
deferment of drilling and a further deduction for risk, gives us a value 
for this remaining portion of the discovery area or lease. 

Non-producing leases may be reported under one head, that of 
undeveloped acreage; a more detailed classification would be of no 
consequence to the Department, as such leases cannot be entered in 
'^ capital sum " until they become productive. The next step is to 
calculate the value of the physical property as of the date of appraisal. 
If it was installed prior to 1913, the original cost must be depre- 
ciated to a 1913 basis. The rate of depreciation of the well equip- 
ment is generally calculated on a straight line for the estimated life 
of the well, but may be made proportionate to depletion. 

The value of the physical property, as of the date of appraisal, 
must now be deducted from the fair exchange value of the whole 
property. This value of physical property constitutes the depre- 
ciable capital sum after an amount or a percentage equivalent to the 
eventual salvage has been subtracted. The fair exchange value, less 
the cost of the physical property, is the depletable capital sum and 
represents value attributed solely to the oil in the ground. It in turn, 
however, should be divided into three parts, one representing the cost 
of the oil reserve, the second that of drilling and exploration (earn- 
ings on both of which are merely a return of capital) and third, the 
remaining portion of the value. The last is an appreciation shown by 
the appraisal above cost. Such earnings can be transferred to surplus 
and increase the invested capital, provided they are not distributed 
as dividends. 



RATE OF DEPRECIATION 149 

Rate of Depletion. — We now have the amount which is to be 
taken as depletion and depreciation allowance through the years, 
in proportion as depreciation and depletion are sustained. It remains 
to ascertain the rate at which the depletion allowances are to be taken 
for use in Schedule V, on Depletion. To do this, one must first get 
the estimated future recoverable reserve of oil as of the date of com- 
pletion. This is a technical procedure similar to that described in 
estimating future production for appraisal purposes. Aid can be 
had from the Manual cited and from Bulletins 177 and 194 of the 
Bureau of Mines. 

The salvage value received in the terminal year may be taken as 
a further deduction from income of that year, since it is a return of 
capital. If the books of the company have not considered salvage 
value, some other procedure, in line with the accounting methods of 
the company, is sometimes used. 

The rate of depletion is based on the rate of decline in production. 
That is, if the reserve is 1,000,000 barrels on one lease, and the de- 
pletable capital sum is $500,000, then a depletion allowance of 50 
cents is deductible for each barrel produced. These depletion al- 
lowances must also be calculated separately for each lease. 

The construction of the curves for ascertaining the amount of 
oil to be depleted is essentially like that of curves for appraisal, 
except that in appraisal the curves, and therefore the valuation, 
must be set up once for all, and no information received subsequent to 
the date of appraisal can be utilized. On the other hand, in making out 
the depletion rate, all the data are utilizable, and revision from year to 
year is not only permissible but is required by the Treasury Depart- 
ment, unless the values involved are of negligible magnitude. 

The economic limit, i.e., how small a well may be before it must 
be abandoned, is a matter to be determined for each field. In doing 
so, one should assume that the limit will become progressively lower 
in the future. 

Rate of Depreciation. — The depreciable capital sum, in so far as 
it is represented by well equipment, should be depreciated on either 
the straight-line method, based on the life of the well, as in Fig. 20, 
or on the basis of unit cost, as in depletion. Features such as pipe 
lines, marketing facilities, etc., receive straight-line depreciation, 
based upon what experience and judgment show to be the probable 
term of life. This will be that of the field rather than of the average 
well. To the capital sum there should be added, each year, the money 



150 TAXATION 

invested in new physical property and also the money spent in the 
new development work, one going into the depreciable capital sum 
and the other into the depletable capital sum. Cost should always 
be entered as the capital sum, unless the well is such as to permit the 
use of ascertained value according to the Regulations. 

Deduction in Cases of Discovery. — Certain conditions give the 
right to use a discovery appraisal right, instead of cost. First, the 
well must have a value which is disproportionate to cost, roughly 
twice its cost or more. Further, the acres of the reservoir appraised 
must have been purchased or leased prior to its having become a 
proven area, and it must not have previously received a discovery 
appraisal. 

The deduction for depletion is allowed only to the party in pos- 
session at the time of discovery and not to the subsequent purchasers 
(Treasury Decision 3089). This means, of course, that the depletion, 
which the purchaser is entitled to, is based on the value at time of 
sale, not on the value at time of discovery. The lessee, as well as the 
lessor, profits by the discovery right. 

The definition of what constitutes a proven area is given by the 
Regulations as the 160 acres of that reservoir surrounding the well in 
question. From this it follows that a well which strikes oil in a differ- 
ent reservoir, although in the same area as that in which the 160 
acres is proven, may constitute a discovery. The area to be ap- 
praised, in case of discovery, is all within " the exterior limit of a con- 
tinuous tract held under leases or in fee by the taxpayer " and included 
within a 160-acre square surrounding the discovery well. In case 
the lease has had a former appraisal, as of 1913, only the value newly 
created is to be used. 

Appraisal of Discovery Wells. — In appraising a discovery well, 
one is, of course, limited to the knowledge of that date. This involves 
the use of a different predicted price curve, one predicted as of that 
date rather than that which would have been used March 1, 1913. 
The Regulations permit the appraisal to be of the date of discovery or 
thirty days thereafter. Unless the value increased during these 
thirty days, one should appraise, of course, as of the earlier date, be- 
cause depletion is most rapid in the first thirty days and is not allowed 
until a valuation is established on the property. Observe that the 
unit to be appraised is not only the well and its supporting acreage, 
but the deposit underlying the acreage of the reservoir extending 
beyond this, which may in some cases be as much as 160 acres. The 



I 



GAIN FROM SALE 151 

Treasury Department will not allow all of this to be appraised as 
if it were truly proven or 100 per cent probable, although it is legally 
so called; it must be appraised on the basis of its " fair exchange 
value." To ascertain its fair exchange value one can, of course, fall 
back on analogous sales as before, or else one may assume a percentage 
value of the inner acreage, which supported the first well, as expressing 
the probability of its being productive. If 10 acres are allowed to 
the discovery well, there are then 150 additional acres or less for 
appraisal as acreage. The value of this outlying acreage is ascertained 
as a percentage of the value of the developed acreage in the center, 
after the drilling and development cost expended, per acre, upon 
the developed acreage has been deducted. The value so obtained 
should involve a further deduction because of the risk of investment 
and the loss of pressure from deferred drilling. 

Even though an area is proven for oil, the discovery of the first 
commercial gas well in this area, if commercial as to its gas alone, will 
permit a discovery appraisal right for gas, if other conditions are ful- 
filled. 

Gasoline Appraisal. — Where gas has a gasoline content in com- 
mercial quantity, obtained either by the compression or the absorp- 
tion method, a separate value should be placed on this product. 
In case the gasoline prospects would have been allowed a value by a 
buyer or seller in arriving at a price of the whole property at the time 
of appraisal, this value is to be included in both the 1913 and the dis- 
covery appraisal. However, where the well is a commercial gas well, 
the gasoline is treated as a part of the gas, not as a third product. 
Where an oil well produces casinghead gas in an amount not sufficient 
to justify drilling for the gas alone, it is considered an oil well with a 
gas by-product, not a '' gas well." 

Gain from Sale. — ''In computing the gain from sale of wells 
discovered after March 1, 1913, the taxpayer is not entitled to set up 
the value as of date of the discovery as the basis of the computation." 
(SoHcitor's Opinion No. 26.) However, where the '' principal value 
of the property has been demonstrated by prospecting or exploration 
and discovery work done by the taxpayer," the tax is limited to 20 
per cent. This opinion results in so heavy a tax in such cases, that 
the seller may well consider whether it is not better for him to hold 
rather than to sell, so as to get his depletion allowances on the higher 
discovery value where that value is permitted. 



152 TAXATION 

Income Tax Law for Previous Years. — While the Income Tax 
Law applying to 1918 is worked out on the same basis as that of later 
years, with differing rates, the Income Tax Law applying to 1916 and 
1917 has one important difference, namely, that the depletion allow- 
ance to the lessee is allowed only on cost, not on appraisal value, and 
that there is no discovery appraisal right. In the case of the lessor, 
however, depletion allowances may be based as in the law of 1918 
with reference to appraisal of March 1, 1913, but not discoveries. 
Note, however, that discoveries made in 1917 and as far back as March 
1, 1913 are permitted for purposes of calculating the tax for 1918 and 
thereafter. 

The laws applying to 1913, 1914 and 1915 grant an allowance for 
depletion only to the extent of 5 per cent of the gross value of the 
product. The law does not permit us to go back and redress this 
deficiency, although this allowance is now admitted to be inadequate. 
It is necessary to take off a sustained depletion in calculating the tax 
for later years, even though it was not allowed at the time. More- 
over, this 5 per cent limit does not apply to the depletion of invested 
capital. 

Conclusion. — Oil companies must realize the great amount of 
labor required merely to hunt up the data necessary to fill in the oil 
questionnaire and its supporting blanks for each producing lease, 
entirely aside from the technical matters of establishing proper valua- 
tion, recognizing which wells have the discovery right, evaluating 
these discoveries properly, and working out the rate of depletion. The 
task commands vastly more attention than has heretofore been given 
to taxation. Preparations for it should be made throughout the year, 
and, when necessary, methods of management and accounting should 
be so changed as to make possible the preparation of an acceptable 
report. The Treasury Department finds it necessary to reject many 
of the reports now submitted. The responsibility for preparing the 
report should be assigned to the appraiser, an officer best assigned to 
the geological division of the land department. 



CHAPTER XVIII 
DRILLING METHODS! 

While the subject of drilHng methods belongs more properly to 
technology than to business, the executive must have some knowledge 
of the principal methods, their applicability to different conditions, 
and their relative expense and limitations. 

Systems of Drilling. — While from time to time in the history 
of the petroleum industry, various methods of drilling have been 
developed to suit particular needs, these are all modifications of the 
two general systems in use today in North America, viz., the stand- 
ard or cable-tool system, and the rotary system. Their various 
modifications, such as the Canadian pole-tool system and others, are 
of interest principally from an historical standpoint. The two sys- 
tems mentioned have been developed to suit different needs as new 
fields were opened, and are seldom used side by side in the same field, 
except in some districts in California and Mexico. 

The rotary method was first employed for oil-well drilling by Cap- 
tain A. F. Lucas, who used it in Texas to drill in the soft Quaternary 
and Tertiary formations of the Gulf Coast. These soft formations 
caused so much trouble to drillers using the " standard " tools of the 
Appalachian field, that it was impracticable to proceed. It is true 
that a few districts in this region have been developed by men from 
the Appalachian fields with the cable tools with which they were more 
familiar, although in the light of subsequent events it is evident that 
the rotary system would have been better. 

1 For complete description of the actual operations used in drilling and in casing 
oil and gas wells, the reader is referred to the following: 
Westcott, H. P., Handbook of Natural Gas. 
Paine and Stroud, Oil Production Methods. 

Bowman, Isaiah, Well-Drilling Methods (U. S. Geological Water Supply Paper 257). 
Thompson, A. B., Oil Field Development. 
Suman, J. R., Petroleum Production Methods. 
McLaughhn, R. P., Oil Land Development and Valuation. 
Jeffery, W. H., Deep WeU Drilling. 
David T. Day and others, Handbook of Petroleum. 

Catalogues of the various supply companies. 

153 



154 DRILLING METHODS 

Operators are loath to change from accustomed methods unless 
conditions seem compelling; and when one system is well established 
in a field, the initial expense of drilling a well by a rival system is so 
much more than by the familiar method, that inertia inevitably im- 
pedes experimentation. This is partly due to the fact that the other 
type of tools is not carried by the local supply houses, and that spare 
parts are difficult to obtain without delay, while the supply of local 
labor does not answer for a class of work with which it is not familiar. 

However, in California and Mexico, a class of men accustomed to 
both systems has been evolved, through the use of the so-called 
'' combination " rigs. A " standard " driller who is afterwards 
trained to the use of the rotary machine is normally more efficient 
than a man who has received his first training with the rotary. The 
reason for this is that the cable-tool drill accustoms the driller to watch- 
ing the variations in the formations through which he is passing, 
since he usually drills with a dry hole and runs the bailer frequently. 
He is thus accustomed to keeping a better log of the well as he goes 
down. On the contrary, the wash from the rotary machine furnishes 
an obscure record as to the formations passed through, and it is diffi- 
cult to keep an accurate log. Furthermore, the weight of the column 
of water used in the rotary system suppresses all minor evidences of 
oil^ gas and water. 

In the matter of casing, when the rotary method is used, there is 
Jess occasion for the use of the driller's judgment, since casing is gen- 
erally dispensed with until the hole has been made. Men trained 
in the use of rotary apparatus may become good mechanicians, but 
as a rule are not able to cope with emergencies to the same extent as 
are those who use the cable tools. 

** Standard " or Cable Drilling System. — This system is also 
called the percussion, churn, or American cable system, and consists 
essentially of a heavy steel bit attached to a manila or wire cable, 
which is raised and dropped in the hole by means of a walking beam 
extending over the hole. 

It is a system adapted for drilhng into formations which are 
sufficiently consolidated to permit the sides of the hole to " stand 
up," so that drilling may be carried on with an uncased hole until it 
is advisable to case off some water- or gas-bearing stratum. The 
Paleozoic rocks found in the Appalachian, Lima-Indiana, Illinois and 
Mid-Continent fields, and some of the harder Tertiary rocks of 
California, are therefore drilled by this standard system. 



ROTARY SYSTEM ' 155 

In some soft formations cable-tool drilling is made possible only 
by the use of an under-reamer to enlarge the hole, so that the casing 
can be lowered. By this means no great length of open hole is left 
uncased and so caving is minimized. 

This work is slower and more expensive than ordinary cable-tool 
drilling, as it is necessary, for each casing length, to change from drill- 
ing to under-reaming and then to put casing in. The mere change of 
operation in itself causes a serious loss of time. 

There are some districts where part of the hole stands up very well, 
while other formations in the same hole cave badly. It is then neces- 
sary to decide which system is the better to use under the circum- 
stances. The added time and expense necessary to under-ream, plus 
the added chance of delay through accidents if the cable tools are lost, 
must be balanced against the greater cost of the rotary outfit, the diffi- 
culty of handling the harder part of the hole with a rotary outfit, the 
probable inaccessibility of spare parts of the less common system in 
the local supply stores, the question of the availability of the larger 
supply of water necessary for the rotary, the necessity for a larger 
crew, and the greater cost of hiring men experienced in rotary drill- 
ing. In the district to which it is best adapted, the rotary consumes 
less time in drilling. For instance, to drill a 2000-foot hole with 
standard tools in Pennsylvania or West Virginia takes about thirty 
daysj^ while to drill a 2000-foot rotary hole in Louisiana takes from 
fifteento twenty days. 

This saving in time offsets, to some extent, the greater labor cost 
per day of the rotary, which requires a crew of five or six men per 
tour as against a standard-rig crew of two men per tour. 

The heavy column of water which must be used in a rotary hole 
puts so much pressure upon the formations that comparatively weak 
or small shows of oil or gas are not indicated at the well head. There- 
fore, the cable system of drilling with a dry hole is better adapted for 
prospecting work, as it gives most data as to the formations passed 
through. Once a field is located, and one can estimate the depth at 
which the ^' pay " and any water sands will be encountered, develop- 
ment work can proceed with the rotary machine, in case it is otherwise 
adapted for use in that field. 

Rotary System. — The rotary drilling machine, as used for oil- 
well drilling, consists essentially of the following units: 

(1) A drilling- stem (usually of 4- or 6-inch pipe), to the lower end 
of which is attached (2) the bit or cutting tool, provided with a hole 



156 DRILLING METHODS 

for the circulation of water. These are rotated by means of (3) a 
geared turntable provided with grips. The pow er required is usually 
supplied by a gas or steam engine, but in some cases by an electric 
motor. A constant circulation of a thin mud " slip " is kept up by a 
special pump, the " slip '' passing down through the inside of the 
drill stem and the hole in the bit at the bottom of the hole, and up 
the outside of the stem. This not only keeps the bit cool, but carries 
the pulverized material up out of the hole. 

The heavy column of water kept in the hole at all times prevents 
the sides from caving, and water and gas sands need not be cased off, 
as^ must frequently be done when cable tools are used. This saves 
not only time and trouble, but also the added expense of extra strings 
of casing, and it obviates the necessity of reducing the size of the hole. 

In steeply inclined, hard beds, where a great deal of trouble is 
caused by crooked holes, a straighter hole ma,y be drilled by the use of 
the Canadian pole-tool system, as it has a series of rods extending to 
the surface instead of a cable. 

Where there are alternating hard and soft strata, while the cable 
tools might, under favorable circumstances, drill in less time, the danger 
of accidents in the soft strata, the delay in handling caves and the 
danger of casing trouble sometimes indicate that the hole should be 
drilled entirely with a rotary machine, a special bit being used for 
the harder portions. The recent development of heavier equipment 
and of such bits as the Sharp and Hughes hard-rock bit has extended 
the use of the rotary machine into a number of such fields. It is 
now claimed that the rotary system can be used advantageously in 
any of the California fields. However, the standard cable-tool sys- 
tem is still used widely, even in those fields, and possibly in others 
where it could be replaced to advantage by the rotary. 

But in other fields, notably the unique Tamasopo reservoir of 
Mexico, the danger from blow-outs and the difficulty of handling 
are much reduced by the heavy column of mud in the rotary method. 

In general, it may be said that the rotary is more expensive than 
the standard for shallow wells and very deep wells, and less so for 
intermediate wells, when both are operating in fields where conditions 
are otherwise fairly well balanced. Deep wells have been drilled with 
a rotary in California, landing 10-inch casing at a depth of 4000 feet. 

The following table, summarizes the advantages and disadvan- 
tages of the two systems. The wise operator or superintendent 
knows his field so well that he can give each of these various fac- 



ROTARY SYSTEM 157 

tors its proper weight, and adopt the system best suited to the con- 
ditions. There is still enough prejudice among practical men, who 
have become more accustomed to one system or the other, to make 
their judgment in some of the new fields open to question. 

STANDARD SYSTEM 
Advantages 

1. Adapted to relatively hard formations, as it can be used for 

the hardest rock, even in considerable thickness. 

2. Lower labor and fuel costs per day. 

3. First cost of rig less than for the rotary outfit. 

4. Less water required for drilling, which is an advantage in arid 

regions. 

5. More drillers available in some fields, although this is becoming 

less true. 

6. Less time lost in prospecting work, and in testing possible 

''pay" horizons, than with the rotary method. 

7. Gives more information as to the formations passed through, 

and is thus better for prospecting. 

8. Less cost per foot for relatively shallow wells, and for very 

deep wells. 

Disadvantages 

1. Not adapted to soft, caving formations. 

2. More time consumed in drilling, especially when under-reaming 

is made necessary by caving formations. 

3. More delays and fishing troubles in soft strata. 

4. When there are many water sands, it is hard to carry a large 

hole to a deep pay sand, and may even be impossible. 

5. Greater cost per foot for moderately deep wells. 

6. More casing necessary to handle caves and water sands. 

7. Liability of getting a crooked hole in soft formations. 

8. Difficulty of controlling heavy pressures and greater likelihood 

of blow-outs. 

9. More danger from dropped, " frozen," or stripped casing. 

ROTARY SYSTEM 
Advantages 
L Faster drilling in soft strata. 

2. Less trouble from caving and water sands. 

3. Less casing used in soft formations with water and gas sands. 



158 DRILLING METHODS 

4. Straighter hole in deep drilling in soft formations. 

5. Less danger from casing trouble. 

6. Can handle alternate hard and soft formations, with less danger 

of accidents than cable tools. This is made possible by the 
new bits and heavier rotary machines. 

7. Can carry a large hole deeper. 

8. When '' drilling in " it is easier to control high gas pressure and 

prevent blow-outs. 

Experience in the Mexican fields has proved that the better method 
of drilling into a heavy pay (when the depth is known) is with cable 
tools and a hole filled with water, since the cable tools, with their 
flexible cable, are more easily blown out of the hole than the rotary 
tools which are held down to the bottom by the inflexible drill stem. 
The well is controlled by a heavy valve after the tools are clear of the 
hole. 

Disadvantages 

1. Very slow in hard strata. 

2. Greater daily labor and fuel cost. 

3. Limited trained labor supply in some fields. 

4. More necessity for cementing. 

5. Greater cost per foot for shallow wells. 

6. Does not show up smaller oil and gas pays, and important 

reservoirs may be passed through in prospecting. 

7. More water necessary, a drawback in arid regions. 

Comparative Costs and Drilling Time. — There are very few 
fields in which the comparison between the standard and the rotary 
systems of drilling is a difficult one. In territory to which the rotary 
is adapted, the cost of drilling with standard tools is abnormally high; 
and in fields to which the standard system is adapted the rotary is 
unduly expensive. Regions that are strictly intermediate are rare. 

While average drilling costs may be given for certain districts, 
Individual wells in such districts may cost 50 to 100 per cent more, 
owing to accidents or unusual underground conditions. In several 
California districts there is enough drilling by each method to make 
comparative costs available. These cannot be applied elsewhere^ 
however, as conditions are dissimilar. 

These averages do not show any remarkable difference in the cost 
of drilling by the two systems; but this can be accounted for by the 
fact that conditions differ greatly within short distances in some of 




MODIFICATIONS 159 

these fields, thus keeping the question of relative advantage pretty 
evenly balanced between the two systems. But the recent improve- 
ments in the rotary system, such as improved bits and heavier ma- 
chines, have increased its use and lowered the cost of drilling by this 
method in the California fields. 

These improvements have at the same time helped drillers and 
operators in the Texas and Louisiana fields, where the rotary system 
was first developed. In the Caddo and Gulf Coast fields there is no 
question as to its being the best method, and in these fields the drilling 
time is much less and the cost per foot is much less than in California. 

The cost of drilling by both systems in the Mexican fields is rela- 
tively high, considering that conditions do not differ much through- 
out the field, and drilling and casing procedure is more or less stand- 
ardized. This higher cost is due to other factors, among the most 
important of which are transportation and duties, the higher cost of 
the extra-heavy materials necessary for the large wells, together with 
high labor cost, the cost of maintaining camps for the men, and un- 
foreseen delays arising from the disorganized state of the country. 

The drilling of isolated wells, in the early development of a prop- 
erty, always costs more than that of later wells. This is because 
certain items, such as the entire cost of rig, casing, fishing tools, etc., 
must be borne by one well, while as the property develops, much of 
this is used more than once, especially the material recovered from 
dry holes. This also applies to other expenses, such as part of the 
cost of road building, rights-of-way and other expenses peculiar to 
each case. 

Modifications. — Various modifications of the two principal sys- 
tems of drilling have been developed, and may be classified as follows: 

(a) Combination system. 

(6) Circulating system for standard tools. 

(c) Portable rigs. 

(a) Combination system. — In the California fields the two sys- 
tems are sometimes combined, one part of the hole being drilled by 
the rotary while another part is drilled by cable tools. In some wells 
in California, the standard tools are used only for drilling into the 
oil sand, in order that it may be better observed and properly man- 
aged. An attempt has been made to rotate the casing, which is 
fitted with a special shoe, at the same time that drilling proceeds with 



X60 DRILLING METHODS 

cable tools; but this has not come into common use even in the 
California fields. 

The combination system is particularly adapted for use in the 
Mexican fields, where it is used in competition with the cable-tool 
system. In these fields the greater part of the hole is in easily drilled 
gumbo and marls, and the remainder in sandy limestones and lime 
sandstones. The procedure is to cement the larger casing at about 
2000 feet with the rotary system, and to use the cable tool to complete 
the hole and drill it. The combination system has the reputation, 
in these fields, of averaging quicker completion time, and of having 
less casing trouble but more cementing trouble. 

(6) Circulating system. — There is a recent improvement in the 
cable-tool system which has some of the good points of the rotary. 
This is the " circulating system " (Paine and Stroud), by which 
circulation of water in the form of a thin mud slip, similar to that 
used with the rotary, is maintained through a special circulating-head 
down through the casing and up the outside of the pipe. This is to 
prevent caving, to shut off gas sand by keeping a pressure on the sides 
of the hole, and also to mud up the walls. A wire cable is used, of 
course, and part of the drilhngs are carried up to the surface with the 
circulating water. However, the drilling is so slow that the method 
will probably never come into wide use. Its field would seem to be 
where the strata are hard and there are many water sands. 

(c) Portable drilling machines. — In comparatively shallow terri- 
tory, a portable machine of the cable-tool type is generally used, 
particularly in the Mid-Continent fields. It has the advantage of 
being easily moved about in wildcat country where roads are bad, 
in less time than is necessary to move a heavy regulation outfit. It 
is, however, not adapted for handling heavy strings of casing without 
additional reinforcement. It cannot, therefore, compete with a 
derrick rig, except for shallow wells, and for cleaning and deepening 
where no new casing will be required. The time saved in moving and 
erecting it, and the comparative cheapness with which such a machine 
can put down shallow wells, adapt it for developing most territory 
where the operator is positive that his farewell sand will not exceed 
1200 feet. Beyond this depth the cost per foot, as compared with 
the standard rig, increases disproportionately. Drilling machines 
of this type were largely used in developing eastern Stephens and 
Nowata Counties, in Oklahoma, and Chautauqua County and other 
shallow fields in eastern Kansas, 



I 



METHODS OF CASING 161 

These machines are in principle the same as the standard outfit, 
except that they are mounted upon a wheel base, and can readily 
be moved from place to place, a mast taking the place of the derrick. 
They cannot handle long, heavy strings of pipe readily; hence their 
principal value is in their adaptation to the following purposes. 

1. Rapid completion of the drilhng of properties whose sands do 
not lie deeper than 1200 to 1800 feet. 

2. Drilling into the sand after a hole has been drilled by a rotary 
outfit. In this way a machine can be kept on a lease and readily 
moved around from well to well, as required. 

3. Prospecting work, where drilling is not too deep, but where 
roads are bad for bringing in heavier outfits, especially boilers. 

Methods of Casing. — There are several methods of casing, the 
choice between them depending upon water conditions in the strata, 
the system of drilling employed, the character of the formations and 
the depth of the hole. 

In drilHng by the rotary system, the hole is usually all of one size 
and but one string of casing is used (except for a short surface string) ; 
the sides of the hole are '^ mudded up " as drilling proceeds, and 
caving beds and minor gas and water sands are shut off in this way. 
However, bad caving and large flows of gas and water must sometimes 
be cased off and cemented, and the hole continued with a smaller 
size of casing. The casing used in such circumstances is heavier than 
that which is used in hard rock fields, as it must resist a heavy col- 
lapsing strain from the outside. 

In drilling by the cable method, water sands must be cased off 
to prevent them from flooding the lower oil sands. This should also 
be done in the case of upper gas sands. Caving formations must 
be cased off to avoid catching the tools and thereby sometimes losing 
the hole. This means that several strings of casing must be seated at 
various depths. 

In comparatively shallow territory, a hole is sometimes drilled 
'' wet "; that is, water sands are not cased off, and the tools are run 
in a hole in which the water stands high. Drilling is usually done 
with a steel cable, as the water offers more resistance to manila cable. 
In such cases, when the sides of the hole stand up v>^ell, casing is not 
put in until the hole is finished. The practice of drilling " wet " 
with cable tools is not adapted to any but hard rock fields; even then 
the time and expense saved in casing rarely justify the slower drilling 
in a wet hole. It is unwise in case of wildcat wells, as the weight of 



162 DRILLING METHODS 

water may suppress indications of the oil, gas or water content of the 
beds penetrated. The last part of the hole is drilled wet in the 
Mexican fields, as a safeguard against the high pressure and volume 
at which these wells come in. 

When the hole caves badly, it is advisable to keep the casing " fol- 
lowing down " not far behind the drill. In such cases it is custom- 
ary to drill a smaller hole and then enlarge it by an under-reamer 
which goes ahead of the casing. Sometimes the formations are soft 
enough to permit dispensing with the under-reamer, by fitting the 
casing with a special shoe which reams out its own hole behind the 
smaller drilling bit. The weight of the casing is frequently sufficient 
to move it; otherwise an hydraulic jack is used to force it down. 

In badly caving or soft formations, such as those found in parts, 
of western Canada, where the casing is liable to become fast, or, in 
the language of the drillers, to " freeze," it has been found advisable 
to use inserted- joint casing. Not only are the joints stronger, but 
the friction in raising or lowering the heavy strings is lessened by 
eliminating the heavy screw collars, which project beyond the pipe 
in the usual type of casing. 

Another system of casing, occasionally used for comparatively 
shallow wells (up to 500 or 600 feet deep), in soft unconsohdated 
formations in California, is the " stove-pipe " method. A similar 
method is used in the Baku fields in Russia. Riveted pipe in short 
lengths is used, one length telescoping into that ahead, while the 
string is forced down by hydraulic jacks as the hole is drilled, or 
" washed " down by working with the walking-beam a bailer-like 
device called a " mud scow." 

This riveted casing is sometimes used as drive pipe, in drilling the 
upper portion of deeper wells which are continued with the usual 
type of casing. In this case, the casing is driven by blows from an 
attachment to the drill stem. 

In drilling in wildcat territory, where the number of water and 
gas sands is unknown and the depth of the oil sand uncertain, the 
ultimate depth of the hole cannot be known, and therefore one must 
start with a larger size of casing than that which will probably be used 
for later wells when the field is developed. Pioneer wells in some 
pools have failed to discover oil because the hole was so small that 
it could not be carried deep enough to penetrate the main oil sand. 
In some cases, this sand was later discovered to be only a few feet 
below the point reached by the early well. Wells in the Mexican 



KEEPING THE LOG 163 

fields are commonly started with 15j-inch casing weighing 70 pounds 
to the foot. 

Some wells in the Turner Valley district, near Calgary in Alberta, 
have been started with 18-inch casing. In California, even larger 
casing has been used. 

The Canadian pole-tool method, and the methods evolved from 
it in Russia and Roumania, are variations of the churn drill, except 
that instead of a cable, ash- or steel-jointed poles are used for lifting 
and dropping the bit. The string of poles and the bit are given a 
more definite rotating motion than in the case of cable tools. This 
is claimed by its sponsors to result in straighter holes when the for- 
mations are much folded or tilted. 

One authority has summed up the comparison by saying that 
the rotary rig is an excellent machine for making a hole, but the cable 
rig is the best for making an oil well. That is to say, the cable rig 
should be used whenever possible, but in places or conditions which 
preclude this, the rotary should be used with the greatest possible 
care and expert supervision. 

In soft, unconsolidated formations, with beds of caving shale and 
gumbo, and so-called boulders which may catch the cable string of 
tools, the rotary method is the only feasible one. 

Keeping the Log.^ — One of the greatest needs at present is good 
logs. Every log should give the top and bottom of every sand which 
carries gas, oil or water, in addition to giving the distance from the 
top of the sand to the level where the flow into the well is found. It 
should also give the distance from the top of the best-known limestone 
or coal bed, and from that of the nearest widely found limestone, coal 
or red bed, to the main producing horizon; and this measurement 
should be taken with a steel line in order that the dip may be prop- 
erly calculated. Where beds are very lenticular, a more complete 
record should be kept of changes in the strata, as the correlation 
of such beds is a difficult matter. 

A distinction should be made between the preparation and care 
used in logs of wells in new districts and logs of wells in a producing 
field. All wildcat logs should, speaking generally, have closer at- 
tention than those in production. Where conditions warrant it, a 
geologist should be retained for the purpose of minutely examining 
the characteristics of each stratum, taking samples at each change of 
formation, and taking every precaution necessary for the completion 

1 Ambrose, A. W., U. S. Bureau of Mines, Bulletin 195. 



164 DRILLING METHODS 

of a log which will be of distinct value to those who will use it. Where 
no geologist is employed, the result is all too frequently a log whose 
reported depths to formations are in multiples of 5 feet, and whose 
strata are reported monotonously as '' shale and shell." Measure- 
ments by estimate from strings on the cable should later be corrected, 
when a steel line measurement shows the cumulative error. 

When a company is drilling in a new field, and can afford it, a 
resident geologist should be kept in the vicinity of each active pool, 
to supervise and interpret the logs of all wells, as is done by the larger 
companies in Mexico. In certain fields this might be done by the 
state geological survey, which might act as a clearing house for such 
information, and advise upon such questions as the correlation of 
certain beds, probable depths, dips in certain directions, and so on. 
The same service could be performed by a competent man whose sal- 
ar^'^ could be paid by a local association of producers. 

The elevation of the mouths of the wells should be obtained, for 
the purpose of calculating the dips; and outcrops in the vicinity 
should be observed and measured, so that the dip beyond the edge 
wells may be ascertained. Without these three sources of infor- 
mation the best results cannot be obtained. 

How Deep to Drill. — Before drilling is begun, it is advisable to 
obtain as much knowledge as possible of the formations through which 
the well will pass. This may be had in either of two ways: 

1. By a study of the well logs of the nearest development drilled 
in the same formations. 

2. By a study of the formations at their outcrop, if this is possible, 
to determine which is the most promising for oil or gas production. 

From this information, the ^' farewell " sand should be decided 
upon, and its approximate depth determined by a measurement of 
the dip of the surface formations along a fine from the nearest point 
of outcrop. 

The determination of the depth at which to abandon drilling, 
when oil is not obtained at the expected depth, is a matter of very 
great importance. One hears many tales of oil reached when drilling 
was about to be abandoned. Besides knowing which horizons should 
be penetrated, it is important to know when the chances have become 
hopeless for a given horizon. This is one of the practical reasons for 
taking steel-line measurements on certain key horizons. The depth 
from the key horizon to the producing sand known in neighboring 
wells is called the interval. The depth to drill, then, is the sum of the 



HOW DEEP TO DRILL 165 

depth from the surface to the key horizon, plus the interval, plus the 
margin of safety. In some fields, drilling is continued for 100 feet 
below what is thought to be the bottom of the sand, before the well 
is abandoned. 

Even when a well produces oil, if there is no water, one should 
drill a reasonable distance into the underlying shale or limestone. 
The distance recommended is generally 10 feet, but may be more or 
less, according to local indications. Below a thin shale member 
there is, not infrequently, more oil-bearing sand. 

Where there is water in the lower part of the sand, as there fre- 
quently is, care must be employed to stop the drill at the proper point. 
There are some who habitually stop before there are any indications 
of water, for fear of reaching it, and others who proceed carelessly, 
and frequently drill too deep. If the pool is young and the pressure 
high, the driller should stop well above the water, leaving the deep- 
ening to the water to a later period; if the water is known, or sus- 
pected from analogy, to be encroaching to a serious extent, the sand 
should be warily entered. If, on the other hand, the pool is old and 
the pressure greatly reduced, and it is known that the water is not 
encroaching in the pool in question, the wisest course is to drill until 
some water sand is obtained, then to fill in for a corresponding short 
distance before shooting. This is possible only in those fields where 
the water is not under great pressure. 

Under such conditions, it is desirable, rather than otherwise, that 
some water should be produced with sand " pay ", as this is usually 
a warrant that the full thickness of " pay " is being utilized, and that 
some neighbor is not getting the benefit of part of it. Where a well 
is on a small tract, or on the edge of a pool, and will therefore be 
operated on the beam or on some neighboring power, one may be more 
conservative as to drilling deep than where a power is available to 
give the wells as much pumping as is needed. 

There are theoretical reasons for believing that there are larger 
reserves of deep gas than is usually supposed. The practice of dis- 
continuing wells without competent consideration of the chances of 
success by deeper drilling is a serious loss in the long run. Thus, 
large areas have been considered " condemned " on the evidence of 
wells drilled to inadequate depths. Such drilHng is a great deterrent 
to the testing of deeper sands, since later tests in the territory cannot 
have the advantage of possible production in the upper sands, and 
because the exact depth of the earlier tests may not be known. 



166 DRILLING METHODS 

The Fuel and Power Supply. — By far the greater part of the 
wells in the United States are drilled with a boiler and steam engine, 
using natural gas as fuel. Wherever gas can be obtained cheaply, 
it is the best choice. Many wells in the Cahfornia, Mid-Continent 
and Mexican fields are drilled with fuel oil used under a boiler, as oil 
is relatively cheap. 

The next choice for a fuel is coal; its desirability depends upon 
market conditions, upon the grade of coal available, and especially 
upon transportation conditions in the field. It should always be 
remembered that in many fields some gas is encountered in the wells 
on the way down to the oil sand; this gas can be used for the rest of 
the drilling in place of the fuel which has been usedup to that time. 
For drilling wildcat wells at a considerable distance from the rail- 
road, as in parts of Western Canada and the Mexican fields, wood is 
frequently used for fuel. Its heating value is not high, and it is rela- 
tively expensive compared with other fuels, when the latter can be 
obtained. Some few wildcats in the Southwest have been drilled 
with brush used as a fuel — principally mesquite and greasewood. 
This is only done as a last resort. 

While the steam engine is by far the preferable form of power for 
drilling, on account of its flexibility, yet the gasoline internal com- 
bustion engine has been adapted by means of clutches to this class 
of work, as have also internal combustion engines using natural gas. 
While gasoline engines have been used from time to time, their use 
has spread only gradually and has been principally restricted to a 
few drilling machines and to the drilling of wildcat wells in sections 
where transportation of boilers and fuel is difficult. Recent improve- 
ments hold out promise of wider use. In order to increase the flex- 
ibility, and hence the use, of the gasoline engine, an electric dynamo 
and motor have been added to one type of drilling machine. Since 
the first cost of the equipment is high, and repairs cannot be so easily 
made at isolated locations, it will not seriously compete with the use 
of gas or other fuel under a boiler, except in unusual instances. How- 
ever, where cheap electric power is available, as in some of the Cali- 
fornia pools, motors have been successfully used for drilling purposes. 
Crude oil engines are being tried in a small way. 

In describing the work of cable drilling machines operated by 
electricity, as compared with those operated by steam generated from 
coal at Bisbee, Arizona, Notman found that electric drills could be 



DRILLING CONTRACT 167 

operated from 10 to 25 cents per foot cheaper than steam. ^ However, 
coal was very expensive in this locality, while electric power was fur- 
nished by the company's own plant at a price of 3.3 cents per kilo- 
watt-hour. Such conditions are met in but few oil fields. 

It is probable that both the internal combustion engine and the 
electric motor will be found better adapted to use with the rotary 
system of drilling than with the cable-tool system. At the present 
time, the California fields are the only ones where electricity has been 
used to a relatively large extent. It is more widely used in Butler 
County, Kansas, than in any other part of the Mid-Continent field. 

Drilling Contracts. — Producer and contractor should invariably 
enter into a contract. The following form is one which has been 
used for deep drilling in Oklahoma. In deeper drilling in other 
fields, payments are sometimes made from time to time as drilling 
progresses. In some fields it is customary for a contractor to drill the 
well on a '' labor contract " basis, the company supplying all material. 
The contractor usually guarantees completion within a certain time, 
and stands the expense of all fishing jobs. It is not unusual for the 
producer to pay a fixed price per diem for under-reaming. 

DRILLING CONTRACT 

THIS AGREEMENT, Made this day of , A. D. 19. . . ., 

between party of the first part, and 

, party of the second part. 

WITNESSETH: That said part of the first part ha covenanted and 

agreed with said party of the second part, its successors and assigns, that said part 

of the first part will drill for said party of the second part a certain well for 

the purpose of obtaining petroleum oil or natural gas, to be known as Well No 

on the farm of in Sec , Twp , Rge 

County, State of 

The material, machinery and appliances necessary for drilling and completing 
said well shaU be furnished, and the work of drilling the same shall be done in the 
manner hereinafter specified, viz. : 

A complete carpenter's rig of good quality (including wooden conductor), to be 

furnished by the part of the part (and all repairs on same while the well 

is being drilled, shall be made by and at the expense of said of the part) . 

All casing to be furnished by part of the part, at his own cost, risk 

and expense. 

Boiler, engine, belt, bull rope, steam and water pipe and connections to be fur- 
nished at the well by the part of the part. 

The expense of fitting up and connecting same to be borne by part of the 

part. 

1 Trans. Am. Inst, of Min. Eng., Vol. LII, page 444, et seq. 



168 DRILLING METHODS 

Fuel to be furnished at the expense of the part of the part. 

Water to be furnished at the expense of the part of the part. 

Oil saver and steel measuring line at the expense of part of the part. 

All machinery, material and appHances furnished by said party of the second 
part, shall, at the completion or abandonment of said well be returned to said party 

of the second part in as good condition as when received by said part of the 

first part ordinary wear and action of the elements alone excepted. 

The said part of the first part further agree. ... to pay all expenses and 

furnish everything necessary to drill and complete said well except the articles and 
apphances herein specifically mentioned to be furnished by party of the second part. 

The said well is to be drilled 

the consideration for which shall be per foot. 

The party of the second part shall pay party of the first part at the rate of 

dollars per day of hours for all underreaming and delays of any kind caused 

on account of the second party — under-reamers to be furnished by party of the 
second part. 

When the said well approaches the oil or gas bearing sand, the part of the 

first part shall notify the party of the second part, or its agent in charge of the farm 
or lease, and thereupon any further drilling and casing into or through the sand shall 
be requested by the said party of the second part or its agent in charge of the farm 
or lease, but the work in connection therewith shall be done by and under the direc- 
tion and at the risk of the part of the second part. 

If oil or gas is found in sufficient quantities to endanger the rig, material or equip- 
ment, part of the first part shall remove at own expense the fires and 

boilers to a safe distance from the well. All pipe and fitting made necessary by 
such removal shall be furnished by said part of the part. 

When completed, unless prevented by too great a volume of oil or gas, the well 

shaU be thoroughly " bailed " and " sand pumped " by said part of the first 

part until all drillings and sediments are removed therefrom and the well thoroughly 
cleaned. 

No part of the contract price above mentioned shall in any event be paid until 
said weU shall be completed to the depth above required, and dehvered to the party 
of the second part, in thorough good order, free and clear of all obstructions 

The part of the first part agrees to begin the drilhng of the said well within 

days from and prosecute the work actively and continuously, 

Sunday excepted) to completion 

IT IS F URTHER AGREED, That time shall be the essence of this contract, 

and that in case the part of the first part shall neglect or discontinue the 

work of drilling said well for the space of days, such neglect or discontinuance 

shall of itself be a forfeiture of all rights and claim of the part of the first pari 

under this agreement without any notice or demand by the party of the second 
part. The party of the second part shall have the right at any time after such for- 
feiture to take possession of said well and complete said well at own risk and 

expense. 

After the driUing of the well should the party of the second part desire to torpedo 

and clean out after the torpedo, the first party agrees to do the work at 

dollars per day of hours at risk of said second party. 



1 



DRILLING CONTRACT 169 

It is hereby agreed that this contract shall be binding on the heirs and assigns of 
the parties hereto. 

IN WITNESS WHEREOF, The part of the first part ha. . . .hereunto 

set hand and seal and the party of the second part has caused these presents 

to be signed by its the date first above written. 

WITNESSES: (Seal) 

(Seal) 

(Seal) 



CHAPTER XIX 
EXTRACTION OF GASOLINE FROM GAS 

The executive of any oil company which has no plant for the 
condensation of gasoline from casinghead gas should consider most 
carefully the advisability of securing such a plant. He should notice 
the variation in the amount of gasoline condensate in gas-well drips 
and in gas traps on oil wells, under varying conditions of tempera- 
ture and pressure, in order to determine whether or not the instal- 
lation of a plant is justified. The additional profit from gasoline 
may be sufficient to warrant the maintaining of old wells for many 
years after they would otherwise have been abandoned. However, 
as the market conditions in the various fields differ, as does the cost 
of the extraction of gasoline, evidence of gasoline condensate should 
be supplemented by (1) a gas analysis, and if this prove favorable, 
by (2) test runs in a small model field plant. These small test plants^ 
are now made in portable form, so that they can be taken from one 
property to another. The amount of gasoline which can be extracted 
from casinghead gas by the compression method varies in different 
localities from 1 to 12 gallons per 1000 cubic feet of gas with 350 
pounds pressure. In commercial practice, most compression plants 
produce from Ij to 3 gallons per 1000 cubic feet of gas, and are able 
to market from 50 to 80 per cent after the loss in weathering and 
shipping. Absorption plants extract from 0.1 to 1.0 gallon per 1000 
feet of gas. 

There are, as has been noted above, two main methods of recov- 
ering the gasoline from the gas: 

1. Compression. 

o Au 4-- (mineral seal oil. 

2. Absorption {.harcoal. 

Compression. — The first method is the original one, and consists 
essentially of extracting gasoline by compression and cooling of the 
gas. It is best adapted to handling very rich gas in relatively small 
volumes, such as the casinghead gas produced along with the oil in 

1 U. S. Bureau of Mines, Bulletin 42, pages 91-110. 
170 



COMPRESSION 171 

some oil wells. As each compressor unit is relatively expensive as to 
first cost and upkeep, and as the gas handled thereby is limited in 
volume, the gas must be sufficiently rich in gasoline to justify the 
method. Usually it does not pay to use this method, unless, with 
allowance for variation under different conditions, the gas is rich 
enough to yield 1 gallon of gasoline for each 1000 feet of gas. 

BurrelP estimated in 1916 that a single unit plant, consisting of 
two gas compressors, gas engines, piping, cooling coils, storage tanks, 
housing, etc., cost from $9,000 to $10,000, and could handle at least 
500,000 cubic feet of gas daily. It is probable that the same plant 
would cost $15,000 or more at the present time. The fixed charges 
vary widely and include interest on the investment, depreciation, 
plant upkeep, accidents, etc., all of which must be taken into con- 
sideration.2 

In the Mid-Continent field, it is generally believed that a com- 
pression plant does not make a profit at the present time unless it 
operates upon a gas which is rich enough to yield at least 1 to IJ gal- 
lons of marketable gasoline per 1000 cubic feet. On the other 
hand, absorption plants can be profitably operated, under ordinary 
conditions, when the yield of gasoline is as low as 0.2 gallon per 1000 
cubic feet, provided the daily production amounts to 1000 gallons 
or more. 

The choice of the location for a plant operating by either method 
depends upon the following factors : 

1. The gasoline content, as shown by analysis of the gas in the 
pool. 

2. The probable life of the wells. 

3. The quantity of gas available. 

4. The market for gasoline, which is determined principally by 
the distance from a refinery where it can be blended, or from which 
low-grade naphtha can be brought for blending with the light gasoline 
produced. 

5. The probable amount of fixed charges, calculated from the 
cost of the plant in that district and the data on expenses at analo- 
gous plants. 

6. The range of gasoline prices in the past for the district in 
question, and the probable future course of prices, as judged by the 

^ U. S. Bureau of Mines, Technical Paper 57 and Bulletin 88. 
2 Westcott, H. P., Handbook of Casinghead Gas. 



172 EXTRACTION OF GASOLINE FROM GAS 

large annual increase in the number of automobiles and the expected 
advance in the price of crude oil. 

7. The market for the residual gas from the plant, after the ex- 
traction of the gasoline. 

8. The benefit derived from operating the plant as an adjunct to 
an oil property which is itself on a self-supporting basis. 

9. The amount of the royalty or rental which must be paid to 
the well owners. 

10. The feasibility of connecting the plant, after the abandon- 
ment of the original wells, with other leases in the district. Where 
this cannot be done, the entire cost of the plant must be borne by 
the wells with which it was originally connected. 

11. The location, with respect to water, transportation facilities, 
and living conditions for the men. These are quite important in 
isolated and arid regions. 

In the compression method, the common practice is to use two 
stages of compression. The first stage discharges at from 25 to 50 
pounds, and the second at from 120 to 300 pounds per square inch. 
The gasoline finally produced is often higher than 88° Be., and this 
necessitates its being shipped to a refinery for blending with low- 
grade naphtha, unless the blending is done at the gasoline plant. The 
blend is generally weathered later, before being sold. The lighter 
portion, ordinarily ''weathered off," has been sold in high-pressure 
tanks for household illumination, and to a limited extent for the cut- 
ting of iron and steel, under the name of ''gasol." Where the 
''gasol" is mainly butane, it is more uniform and satisfactory. One 
company is putting out this fraction for such commercial uses. 
Onty large plants can undertake this saving, as any one group of wells, 
during its history, usually shows too rapid a dechne in the yield of 
''gasol," a decline that is much more rapid than that of the gasoline 
content. 

The pressure used in the second, or high stage, is governed by the 
gravity of the gasoline it is desired to produce. If too high a pressure 
is used, the very light gases are also extracted, and these are in turn 
easily lost by evaporation, in the weathering process. It is not cus- 
tomary to produce more than 150 pounds pressure in the second stage 
of the compression, yet this should be a matter of experimentation 
at each plant where conditions differ from those in other fields. For 
example, different gases produce different qualities of condensate, 
and in one case the gasoline produced may lose relatively little by 



ABSORPTION PROCESS 173 

weathering, while the same compression on another gas will give 
a " wild " gasoline, which cannot be shipped without weathering. 
Again, there may be a limited local market for very light gasoline 
for special purposes, in which case the gasoline might be sold at a 
premium without blending. If this country develops an increasing 
market for the very light distillates which can be used for various 
purposes in the chemical industries, there will be a tendency to in- 
crease the pressures in the gas-gasoline plants in order to recover 
more of these products. 

The gas from an oil well increases its proportionate load of con- 
densable vapors as the pressure of the well declines with time. More- 
over, the gasoline extracted becomes regularly heavier as the well 
ages. Casinghead gas which is too " lean " at high pressure may, 
therefore, become suitable later. Gas wells without oil, which are 
generally too " lean " at first, may become suitable for condensation 
when the pressure is greatly reduced. This applies more particularly 
to gas which is found in the same pool with oil. 

In some pools it has been found that the best results are obtained 
by keeping a vacuum on the wells from which casinghead gas is being 
obtained. The degree of vacuum is a matter for individual experi- 
mentation in each plant. Various plants in southwestern Pennsyl- 
vania are using from 4 to 28 ^^ points " (inches of mercury below 
atmospheric pressure). The vacuum should be gradually increased, 
as the pressure of the well falls, at a rate to be determined experi- 
mentally in each case. 

Absorption Process. — Fortunately, another process has been 
developed. This is the absorption process, which makes it feasible 
to treat great quantities of gas rapidly, so that all the gas in a main 
line may be handled. This second method is used for relatively lean 
gas, and consists essentially in running large volumes of such lean 
gas through mineral seal or similar absorbing oil or charcoal. The 
oil or charcoal absorbs the heavier hydrocarbons in the gas. If 
the gas is afterwards to be sold for fuel or carbon black, and is suffi- 
cient in quantity, it has been found profitable to extract the gas 
even when the yield is as low as .12 gallon per 1000 cubic feet. This 
process is therefore of especial interest to gas companies. However 
a very large absorption plant has recently been built at Burbank, Ok- 
lahoma for casing-head gas. 

Where compressors are needed to raise the pressure of gas for 
transportation, the gas should enter the absorbers after being com- 



174 EXTRACTION OF GASOLINE FROM GAS 

pressed. The oil, with its absorbed gasoline, circulates through a 
continuous still, where the gasoline is distilled off and is then con- 
densed. The oil then returns to the absorbing apparatus. This is 
very long, in order that there may be ample opportunity for contact 
between the absorbing oil and the gas. There are vertical absorbers, 
in which the oil percolates through stones or loose metal, and ab- 
sorbers built of horizontal pipes with baffle plates. The circulation 
of the absorbing oil is continuous, but the rate is adjusted according 
to the amount of gasoline to be removed from the oil. 

Absorption apparatus can be installed to handle any desired quan- 
tity of gas, from a few thousand feet per day up to 20,000,000 feet 
per day; it handles large and small quantities to equally good ad- 
vantage. This process is especially valuable when the gas product 
is to be transported in lines where rubber couplers are used, instead 
of welded lines. The gas made from the absorption process is " dry," 
and therefore does not deteriorate the rubber in the couplings. 

In some cases a special refrigeration apparatus is used in con- 
junction with the absorption plant, to increase the efficiency of the 
process. In a few cases, refrigeration alone has been used to extract 
gasoline from the line gas. 

Absorption with Naphtha. — Some large absorption plants use 
naphtha as an absorbing oil, instead of the usual mineral seal oil. 
Low-gravity naphtha is introduced into the absorbers and, as the gas 
is run through, the absorbed light gasoline gradually raises the gravity 
of the absorbing naphtha, until a mixture approximating commercial 
gasoline results. This is drawn off and sold. The chief advantage 
of this process is that redistillation of the oil is not necessary. Fur- 
thermore, there is no loss of absorbing oil. This method is recom- 
mended where there is a refinery so near at hand that naphtha can 
be piped constantly to the absorbing plant to replace that which has 
been used. 

Absorption with CharcoaL — Where charcoal is used as the ab- 
sorbent, the advantage of circulation, such as is used with the oil, 
is lost, and the process is necessarily an intermittent one. One of 
the three towers is disconnected from the gas as soon as charged, and 
the gasoline is then driven off by steam, after which further time is 
lost by cooling. This disadvantage, as well as the difficulty of re- 
claiming all the gas absorbed, has so far prevented the charcoal 
method from being widely accepted, with the result that it is still 
far less used than the oil method for absorption. 



PROVISIONS FOR ROYALTY 175 

Choice of Process. — The decision as to which process is best 
adapted to each case, where the quahty of the gas is intermediate, 
must depend upon various other factors. It is necessary to con- 
sider the probable persistence of the volume, the cost of each type of 
plant per unit of gasoline capacity, the familiarity of the men already 
in the organization with each type of plant, and the extent to which 
the gas will tend to become richer in the future, as the pressure goes 
off the field and the volume correspondingly decreases. 

The utilization of casinghead gas for the manufacture of gasoline 
is best carried on as a secondary operation in either of the two types 
of companies listed below: 

1. Natural gas companies having a market for their dry gas, or 
oil companies closely affiliated with such gas companies. 

2. Oil-producing companies, with affiliated refining companies, 
wnich take the unblended gas-gasoline and blend it as a part of their 
general operation. 

Methods of Marketing Gas-Gasoline. — There are three methods 
of marketing gas-gasoline at the present time : 

1. Selling to a refinery for blending with low-grade refinery 
naphtha, in order to make a commercial grade of gasoline. 

2. Bujdng the low-gravity naphtha for blending at the gasoline 
plant, which then markets its own gasoline. 

3. Selling the product without blending, for special purposes. 
There is a small, but expanding market for the light absorption gas- 
oline in the chemical industries, as well as for aeroplane fuel. 

Provisions for Royalty. — Since the main line gas may be run 
through a large absorption plant without paying additional royalty 
to the original landowners, beyond that paid for the gas wells as such, 
most absorption plants have this additional advantage over compres- 
sion plants. As wells come in on new gas leases, this advantage will 
probably disappear, owing to the gradual introduction of special 
clauses in the new leases. 

In new oil leases there are usually clauses determining the amount 
of payment for the gasoHne extracted. This may be a royalty to be 
paid on the gasoline extracted, and may or may not be at the same 
rate as the royalty on the oil. Other leases provide for the payment 
of a fixed rate, in cents per thousand cubic feet of the casinghead 
gas consumed, without reference to the amount of gasoline produced 



176 EXTRACTION OF GASOLINE FROM GAS 

therefrom. The most common method of all is to fix a price for the 
casinghead gas '^ used off the premises," regardless of its amount. 

In the case of old leases made before the extraction of gasoline 
was contemplated, a supplemental agreement has usually been mu- 
tually agreed upon, in one or the other of the two ways just men- 
tioned, although there is no judicial decision, known to the writers, 
determining that such royalty or rental must be paid or, if so, in 
what way. The three cases that govern extracting gasoUne from 
gas are the following: 

1. Locke vs. Russell (W. Va. 1915)^ in which it was held that 
payment for casinghead gas used for gasoline extraction was not to 
be governed by the ordinary provisions for gas- well rental; 

2. Prichard vs. Freeland Oil Company (W. Va. 1917)^, in which 
it was held that commercial gas, sold from a shallow sand in a well 
that produced oil in a deeper sand, was to be governed by the gas- 
well rental clause ; 

3. United Natural Gas Company vs. Alum Rock Natural Gas 
Company, (Venango County, Pa., 1917), in which it was held that a 
gas-transporting company, which had contracted for gas from certain 
wells, was entitled to the gas as produced, and therefore containing 
the gasoline vapor that was present and which the transporting 
company was removing by absorption. The producing company was 
enjoined from erecting its own absorption plant. This case was never 
carried to a higher court. These three decisions do not directly indi- 
cate what would be the outcome if an ordinary casing-head gas 
compensation case should be adjudicated. " 

1 84 Southeastern 948. 

2 93 Southeastern 871. 



CHAPTER XX 

THE MEXICAN SITUATIONi 

Introduction. — The production of oil in Mexico is closely related 
to the industry in the United States, for the following reasons: 

1. Mexico borders upon the United States. 

2. Mexican oil is largely refined and marketed in the United 
States. 

3. The majority of the producing companies in Mexico are con- 
trolled in the United States. 

Mexican wells have always been unusual in the enormous size 
and persistence of their flush production. This flow has continued 
with little or no decline until suddenly the well has '^ gone " to salt 
water. The markets of the United States have often been affected 
by a " flood " of Mexican crude oil, and if Mexican imports should 
be materially reduced, our markets would experience a period of 
marked and possibly difficult readjustment. Hence, anything which 
affects the Mexican situation must also affect the oil industry in this 
country. 

Imminence of Failure of the Present Producing Pools. — As has 
already been predicted by several writers in recent papers, the pro- 
ducing areas in the so-called " Southern fields " in the Tampico 
Embayment, have only a limited oil reserve. These areas are being 
'' pulled on " by every pipe line in that region, and the length of time 
until they are drained is the important element determining how long 
the present large daily oil shipments of these companies can continue. 
However, this is not the whole story, and Mexican oil will continue 
to be a large factor in the market for a long time after the areas men- 
tioned above have been drained. The past and present producing 
fields will be discussed separately, in order that we may establish a 
basis for comparison, the only method by which underground re- 
serves can be estimated in these fields. 

^ Published as a paper on the " Mexican Oil Fields," by L. G. Huntley and 
Stirling Huntley in the Bulletin of the American Institute of Mining and Metal- 
lurgical Engineers, SeDtember 1921. 

177 



178 THE MEXICAN SITUATION 

Method of Computing Reserves. — The method used is one of 
comparison with the Tepetate-Chinampa Pool. In that pool, the 
oil-water contact was originally encountered at 2250 feet below sea 
level. The pool had an area of 625 hectares above the original salt 
water line. The average height to the top of the reservoir at all 
points, was 173 feet, giving total cubic contents of the dome above 
salt water of 11,632,500,000 cubic feet. This consisted of cavernous 
limestone containing oil, of which 126,000,000 barrels were estimated 
to have been produced at the time of depletion. Thus, each 90 cubic 
feet of limestone produced one barrel of oil. In the following es- 
timates this saturation factor has been used in computing the oil re- 
serves of the proven areas still underlain by oil. It could not, of 
course, be used in regions in Mexico where the Tamasopo lime- 
stone of this general character was not the reservoir. 

Producing Areas. — Dos Bocas. The first of the large wells so 
characteristic of the Southern fields in this region was drilled in 1908 
at Dos Bocas (Fig. 25). It ran wild for two months, and at the 
end of that time it yielded an increasing proportion of hot salt water, 
finally producing salt water only, which it still yields. Several 
smaller neighboring wells drilled previously were flooded with salt 
water as a result, and the pool ceased to produce. There is thus no 
history of production upon which to base comparisons with other 
fields. Dos Bocas is the most northern of these domes which lie 
along the crest of the main fold intersecting the coast at this point. 
The Aguila Company has recently completed a good well in San 
Geronimo, several miles southwest of Dos Bocas. As the producing 
horizon was encountered at 2294 feet below sea level, it seems probable 
that this well is located on the southern end of the Dos Bocas area. 
This is also borne out by the fact that the well produces oil of 14 
gravity, while the field to the north and south produced oil of 19 grav- 
ity or better, indicating that this was a pocket of oil cut off by a body 
of hot salt water. 

Tepetate-Chinampa. The initial large well drilled on this struc- 
ture was Juan Casiano No. 7, drilled in 1910. This well produced 
from the pool without the competition of other companies until 1917^ 
when several other pipe lines were completed. Thus the Huasteca 
Petroleum Company shipped approximately 85,000,000 barrels of 
oil from the pool, out of a total of approximately 126,000,000 which 
the pool had produced at the time it was finally flooded in 1920. 
The salt-water table moved up the flanks of the structure with re- 



PRODUCING AREAS 179 

markable regularity, as the oil was drawn off. Starting from the 
2250-foot contour below sea level, it moved gradually up to the crest, 
where the pay formation lay at an elevation of approximately 1800 
feet below the same datum plane. The estimated area originally 
underlain by oil was 625 hectares, and the vertical height o: the 
reservoir, at its point of greatest thickness, was 350 feet. 

Amatlan-Naranjos-Zacamixtle Pool. The next independent pool 
south of the Tepetate-Chinampa pool is cut off from the field to the 
north by a sharp saddle or fault, and is separated from the Cerro 
Azul pool to the south by a low saddle which is also probably ac- 
companied by faulting. While there are several domes along the 
crest of this reservoir which may be separated by faulting, the fold 
is here considered a single producing unit. Up to January 1, 1922, 
this district had produced approximately 150,000,000 barrels of oil. 
On the southern end (Zacamixtle) this depletion was more rapid than 
in the north, because of low porosity. 

Cerro Azul — Toteco Pool. The crest of this structure reaches 
a considerably higher vertical elevation above the salt-water table 
than do those structures toward the north which have just been 
discussed. The highest contour in the Cerro Azul — Toteco Pool 
is apparently 1290 below sea level. The estimated area is approx- 
imately 1350 hectares, with a vertical oil column of 450 feet. The 
greater vertical height of this structure represents a correspondingly 
greater cubical content per hectare. By comparison with the Tep- 
etate-Chinampa field, it is therefore estimated to contain a reserve 
of 150,000,000 barrels on January 1, 1922, making allowance for 
large amounts of gas in the reservoir of Toteco. There have already 
been produced about 60,000,000 barrels of crude oil, the greater part 
of which has come from the Huasteca Petroleum Company's well 
No. 4, in Cerro Azul, which was drilled in 1914. At the present time 
there are only three companies represented by leases and wells in this 
pool, although other claimants exist and may possibly obtain repre- 
sentation through title litigation, as frequently happens in many 
of these tracts. Oil is purchased from these companies by others 
having outlet pipe lines. 

Potrero Del Llano — Alazan Pool. After producing approxi- 
mately 117,000,000 barrels of oil, this pool finally yielded little but 
saltwater in 1917. Since that time, however, by " pinching in " 
old wells and drilling strategic locations, a considerable daily produc- 
tion has been worked up and is still maintained (January 1, 1922). 



180 THE MEXICAN SITUATION 

The highest producing contour in this pool was about 1750 feet below 
sea level on the Alazan end. More or less emulsified oil is produced 
from these " stripping " wells, to which have been added several 
wells drilled farther South in Cerro Viejo. 

Tierra Blanca — Chapapote Pool. The first well was completed 
in this pool in May, 1921, and there is therefore no history of pro- 
duction. The Tamasopo lime lies at approximately 2000 below 
sea level in this well. In case the general salt-water level is the same 
on this fold as in the pools to the north (2150), the amount of oil 
to be obtained is relatively small; however, this remains to be de- 
termined. The territory is controlled by one company (Huasteca 
Petroleum Company), and it will therefore be a non-competitive 
pool. 

Alamo Pool. The producing formation in this pool is a lime- 
stone some distance above the Tamasopo. Several " pays " are 
encountered, and at least two distinct grades of oil. Salt water has 
seriously invaded the small producing area, and the wells were " strip- 
ping " approximately 7000 barrels per day during a part of the year 
1921. The pool has produced about 35,000,000 barrels of oil, but 
probably without affecting the nearby Tierra Blanca reservoir. 

The Alamo pool is also a non-competitive pool, being controlled 
by the Penn-Mex Fuel Co. 

Molino Pool. One well on this tract has been drilled into a pay 
reservoir in the Tamasopo limestone, at a depth of 2710 feet, and is 
thus the lowest large producing well in the Tampico Embayment. 
Its production is rated at 20,000 barrels per day, or more, but it pro- 
duces a very heavy, viscous oil of about 11 Be. gravity, which it has 
so far been impossible to pump to the coast. It is apparent that 
conditions are more complex in the Tuxpam River district than in 
the region to the north. A well recently drilled, by the same com- 
pany, on the Zapotal tract, south of the river, showed some light 
oil in what is apparently the San Felipe series above the Tamasopo. 
It was, however, drilled deeper into the salt water and abandoned. 

Panuco River Pools. These areas lie along the crest of a broadly 
plunging arch, and produce both from the San Felipe and the Tama- 
sopo formations. While locally there seems to be a general salt- 
water table below which no oil will be found, yet the porosity of the 
lime in any particular area seems to be the main factor in determining 
its productivity. Neither the Panuco nor the Topila districts have 
been finally delineated by dry holes, and there is good reason to 



SUMMARY OF MEXICAN FIELDS 181 

believe not only that they will be extended but that new areas will 
be brought in along the broad crest. 

Summary of Mexican Fields. — The value of any comparison of 
leases located on the crest of these folds depends upon the amount of 
oil which the owners of such leases, by means of their pipe lines and 
organization, can ship and sell during the time the total amount of 
oil is being depleted by the various companies producing from the 
same pooL Also, certain wells at the extreme crests of the reser- 
voirs are found to continue producing for long periods when '^ pinched 
in," after the field as a whole is flooded. Companies controlling such 
wells have a valuable asset which may in the end give them better 
returns than the original wells. 

After the Chinampa pool was drained, several wells located at the 
crest were able to " strip " substantial amounts of oil by " pinching " 
the wells in, and this is also being done at Amatlam, Potrero, and 
Alamo. Meanwhile, the Panuco River fields to the north have not 
been circumscribed by dry holes, and they continue to produce sub- 
stantial amounts of oil, with the probability of increase in the future, 
both in number and in area. This may be shown as follows: 

Daily production by fields early in 1921, before the market decline 

Panuco River fields 145,000 barrels per day 

Amatlan-Naranjos-Zacamixtle 400,000 " 

Cerro Azul — Toteco 30,000 " 

Alamo 10,000 " 

585,000 

Estimated daily production by fields, January 1, 1922 

Panuco River fields 145,000 barrels 

Tepetate-Chinampa (stripping) 10,000 " 

Naranjos-Amatlan-Zacamixtle (stripping) 20,000 " 

Cerro Azul (three companies) 350,000 " 

Tierra Amarilla (stripping) 10,000 " 

Potrero-Alazan (stripping) 10,000 " 

Alamo (stripping) 7,000 " 

Total 552,000 " 

Cerro Azul and Tierra Blanca, are estimated to have a reserve 
capable of yielding an average of 200,000 barrels for 571 days, and 
that they will produce at the combined rate of 350,000 barrels per 
day at the time of their being finally flooded. They should then in 
their turn be able to strip 10,000 barrels or more per day each from 



182 THE MEXICAN SITUATION 

wells on the crests. While it is impossible to say how long this strip- 
ping can go on, there is good evidence that such wells will be long- 
lived, as they are probably fed by oil working up the flanks of the 
structure over the entire former producing area. Much of this oil 
must have been cut off by the sudden flooding of the pools, and will 
now be largely available to such strategically situated wells as those 
mentioned. This will allow one to estimate that after all the southern 
pools have been flooded, there will still be a production in the Mex- 
ican fields of 250,000 barrels per day in April, 1923. 

New drilling in the Panuco River field may be expected to increase 
production there. This alone is a sufficient amount to be a consid- 
erable factor in the oil market, particularly the fuel-oil market. 
Meanwhile it can be assumed that prospecting will probably have 
extended the producing areas in the Panuco River district and those 
to the south and west of the Alamo. In the latter region there is 
good evidence indicating that there will be found pools of relatively 
light oil in sand and limestone formations above the Tamasopo, as 
well as in the latter formation itself. The probable pools yielding 
from reservoirs above the Tamasopo will undoubtedly have smaller 
wells, which will produce over a longer period of time in comparison 
with the large Tamasopo wells to the north. It is even possible, if 
later and higher prices warrant it, that this region may see pumps 
installed for the first time in Mexico. 

Possible New Fields. — The geological evidence in favor of 
developing other oil-producing districts in Mexico, in the next few 
years, will be discussed in the following paragraphs. 

The main districts in which prospecting is being carried on will 
be discussed separately in their relation to the general geological 
conditions found in the Tampico Embayment. 

They may be listed as follows (Fig. 25) : 

(a) Area north of the Tamesi River, towards the international 
boundary. 

(b) Panuco arch. 

(c) Tempoal Valley. 

(d) Upper Tuxpam River Valley. 

(e) South of the Tuxpam River. 

The Known Reserves. — The present reserves in producing fields 
may be shown as follows: 



OIL-PRODUCING HORIZONS 183 

Cerro Azul — Toteco $150,000,000 

Tierra Blanca 50,000,000 

Panuco River pools 

" stripping " old pools 

(These areas have not been limited and seem capable of 
considerable extension) 

Total $200,000,000 Plus 

These amounts disregard later recoveries from the same areas 
through stripping wells, as the factor used in the calculations was 
derived from the data in the Tepetate-Chinampa area, which excludes 
Later recoveries: 

GEOLOGICAL FACTORS 

Oil-Producing Horizons. — Up to the present time-, practically all 
the oil from the fields in the Tampico Embayment has been produced 
from porous limestone near the top of the Tamasopo limestone, or 
from that limestone itself. The limestone is not porous " per se " 
but has been channeled, probably both by solution at a time of emer- 
gence in some areas and by underground water circulation, apparently 
promoted by the igneous intrusions of late Tertiary age, which are 
common in the field. Such cavities and channels are filled with oil 
on the crests of some of the main folds in the region, and, as would be 
expected, these spaces are filled with water down the dip on the 
flanks of such folds, and in the basins. 

The large wells, however, are entirely dependent upon the voids 
in the limestone, and as these voids are apparently greater where 
associated with the basaltic rocks found in certain parts of the region, 
it would seem to follow that where such intrusions were absent, or 
infrequent, the limestone would be less productive, or non-productive. 
These conditions seem to prevail in the Tempoal Valley and also to 
the north of the Tamesi River toward the Rio Grande, where in- 
trusives are not only relatively scarce, but in most cases are older 
than those to the south. Thus, while a few seepages exist north of 
the Tamesi Valley, and also in the Tempoal Valley, as a rule they are 
small and " dead " or merely veins of asphalt, as though leakage had 
long ago dissipated any possible underground accumulations of oil. 
The relative lightness of the oil in a few of these seepages, in com- 
parison with those found along the crests of the reservoirs, may be 
accounted for by considering them as filtered through a considerable 
vertical column of shale. 



184 THE MEXICAN SITUATION 

Migration of Oil and Its Barriers. — The migration of all fluids 
in the sedimentary formations in the Tampico Embayment must 
have been, in general, westward, that is to say, from the region of 
higher pressures caused by depth on the Gulf side toward the mountain 
outcrop to the west. Any interruption of this migration must have 
been caused by the tops of folds, where the formations were suflaciently 
open to catch and retain the oil above the general salt-water body, or 
by fracture or fault zones which allowed its escape upwards to the 
surface, or by both causes. In the Tampico Embayment there exists 
a line of folding, flanking the coast, where both conditions exist. 
In fact, the groups of numerous live seepages at the surface were the 
first evidence of the fold to be noticed by the early exploiters of the 
field. Thus, any oil which passed this first line of folding could only 
be a remnant which could spill across the low places in the arch. As, 
immediately west of the crest of this first arch, the number and size 
of these igneous intrusions increase greatly, and as at each intrusion 
of basalt cutting through the upper formations there is an outlet for 
the leakage of any oil underground, the territory to the westward 
suffers from the following disadvantages: 

(a) Less oil from migration. 

(6) More dissipation, through having to pass a zone of intrusives 
in migrating westward. 

(c) General synclinal conditions, which are favorable for water 
accumulation rather than oil, especially as the outcrop of the sandy 
San Felipe is open to infiltering waters on the west, at an elevation 
which would give it a high pressure. 

(d) Proximity to mountain folding, which, with its accompany- 
ing heat and pressure, may have destroyed some of the oil reservoirs. 

The Tempoal Valley thus suffers from the first three of these 
disadvantages, and possibly from the last as well. However, good 
structures on the flanks of such a basin may be expected to produce 
oil in relatively small amounts, even with the comparatively low 
'' porosity " of the Tamasopo. The drilling carried on by the Pearson 
interests, at San Pedro, gave results which are evidence of what 
may be expected. In future such areas will be valuable, as the older, 
more prolific fields become exhausted, particularly since this is a 
high-grade oil. 

The same considerations which were disadvantageous to the 
Tempoal Valley make the crest of the Panuco arch appear very 



AREA SOUTH OF THE TUXPAM RIVER 185 

attractive for the future. In the Panuco field, and the surrounding 
district, the oil accumulations seem to be comparatively independ- 
ent of local structures, which are not strongly marked, and seem to 
be governed by the local porosity of the limestone. If this holds true 
generally, there will be a great deal more oil produced from this re- 
gion, as in the northern part of the embayment area. This broad 
arch constitutes the first barrier to the migration of oil from the east 
and the southeast. The oil found apparently increases in specific 
gravity from the Panuco River toward the north. That found at 
Los Esteros will barely flow. 

Tamasopo Outcrops. — North of the Tamesi River, the Tama- 
sopo lime outcrops in the Sierra Tamaulipas, as the result of an uplift 
which occurred during the later Cretaceous times. Thus, this out- 
crop has been a leakage zone toward which a wide area of sedimentary 
rocks have been draining for a much longer time than the period 
of leakage along the comparatively recent basaltic intrusives in the 
southern fields. The same conditions prevail in the Tamasopo, 
which bounds the Tampico Embayment to the west and south. 
Prospecting in such areas, between the first barrier to the east and 
the Tamasopo outcrop to the west, should be postponed till more 
favorable regions have received proper attention. 

Upper Tuxpam River Basin. — (Fig. 25). From available sur- 
face evidence and from the drilling data collected up to the present 
time, one infers that the Dos Bocas — Alamo fold plunges steeply 
south of the Tuxpam River. This would necessarily leave a gap 
in the main line of folding, across which westward migrating oil could 
pass, to be caught further in by structural folds lying at the head 
of the embayment west of this gap. Since certain of these folds are 
well marked and have seepages and basaltic intrusives near their 
crests, they certainly give promise of favorable results when tested. 
These various features are less favorable here than on the structures 
along the present producing fold to the north and the strategic po- 
sition of these southern folds is not as good, but they constitute the 
type of structures which will be tested in the future. The chances 
are good that they may develop fair-sized wells with a lighter oil 
than the present fields yield. 

Area South of the Tuxpam River. — As stated above, to the south 
of the Alamo the evidence at the present time seems to indicate that 
the main fold plunges rapidly and will not connect directly with 
any fold in that direction. However, in the region between the 



186 



THE MEXICAN SITUATION 




Fig. 25. 



AREA SOUTH OF TUXPAM RIVER 187 

Tecolutla and Cazones Rivers, a relatively sharp fold is found, which 
brings the Tamasopo lime within drilling distance of the surface. 
This fold apparently constitutes the first barrier fold east of the coast 
in this region,' and as it contains both seepages and recent intrusives 
along its crest, should constitute a good reservoir for oil. To the 
west and southwest of the barrier fold the Tamasopo is exposed at the 
surface, as is also the San Felipe. This territory cannot be considered 
particularly favorable, even though numerous seepages are found 
here close to the mountain front. The general strike of the folding 
changes abruptly in the vicinity of the Mautla River, bringing the 
Tamasopo close to the surface, along a fold with a northeast-south- 
west axis, which, together with the eastward limestone front to the 
south in the vicinity of Misantla, limits the Tampico Embayment in 
this direction. 

In general, it may be predicted that any folds which bring the 
main reservoir rocks within drilling depth along a zone flanking the 
coast, and which at the same time do not have their reservoirs ex- 
posed, should be the best prospects for the development of oil pro- 
duction. The Furbero field produced oil from a volcanic sand, found 
in the Mendez shales, a considerable distance vertically above the 
Tamasopo. 

Such folds, in this extreme southern end of the Tampico Embay- 
ment area, partake of the following advantages: 

(a) Well-defined structures in a general region that has already 
produced oil. 

(b) Presence of typical surface evidence, such as live seepages and 
recent igneous intrusions, which are accompanied, in the northern 
districts by ''porous" Tamasopo limestone underground. 

(c) Relatively shallow drilling depth at crests of reservoirs. 

(d) Same relative strategic position as the present producing fold 
north of the Tuxpam River. 

(e) Possibilities of additional oil-bearing formations, above the 
Tamasopo. Both the San Felipe and overlying shales contain fre- 
quent beds of sand in this region south of the Tuxpam River. As 
stated previously, the Furbero district produced from a sand in the 
Mendez shales, while the recent well drilled by the Penn-Mex Fuel 
Company at Zapotal encountered at least one good pay sand before 
reaching the Tamasopo lime. 



188 THE MEXICAN SITUATION 



GENERAL SUMMARY 



In conclusion it seems to the authors that the present fields will 
continue to produce oil in large quantities during the time required 
to carry on prospecting for additional pools. Certain of the areas 
now being explored or already in the hands of strong companies offer 
excellent possibilities for the development of new and important pro- 
duction. 

However, tJtie opening up of these new fields will require new roads, 
railways, and later, pipe lines. These will, in general, be longer and 
more expensive than the present system of transportation, which 
has been built up for the present producing areas; and probably some 
of these new facilities will have to be operated as units separate from 
those already installed. The present transportation system must in 
large part be amortized out of the present producing fields. Costs 
of producing and operating will be higher per barrel than in the past, 
as wells will be, in general, smaller, and the fields will be more distant 
from each other. It is probable that the oil in the new pools will be 
of a higher grade, but even this cannot compensate for the higher costs 
of production. 

These conditions will probably force upon the operators the ne- 
cessity of cooperative or common-carrier pipe lines, railroads, 
telegraph lines, etc. The smaller companies will not usually be able 
to afford and maintain independent lines and equipment. In other 
words, producing conditions will more nearly parallel those prevail- 
ing in the United States than has heretofore been the case. 



CHAPTER XXI 

METHOD FOR PREDICTING FUTURE PRICES 
OF PETROLEUM 

By 

Paul Ruedemann^ 

Purpose of Predictions. — There are many reasons for desiring 
an estimate of the future price of oil. It is of value in deciding on the 
sale or retention of an oil property, on the advisability of a prospective 
large investment in lands or wells, and in making a decision as to 
whether immediate development or delayed investment would finally 
yield the greater returns. On the other hand, there are situations 
where the probable future price of oil has a slight influence on the 
program of the operator, as where competition is forcing immediate 
development, or where lease contracts stipulate that wells shall be 
drilled within a certain time. In cases where an oil field is under 
competitive development, the price a few months hence is of most 
concern. Where a field is substantially monopolized, the entire 
future course of prices requires full consideration. 

The price of oil is a greater factor in areas of small production than 
in those of large production, as a drop of a few cents per barrel may 
mean inability to operate at a profit and hence the abandonment of 
the leases. On the other hand, the high prices paid for oil in 1920 
resulted in the revival of some wells or pools which had been abandoned 
years before because they had been considered too small to be worth 
operating at the low price of that time. Many producers who pur- 
chased high-priced acreage in northern Oklahoma a few years ago were 
saved from a loss, not by the large production they had depended upon, 
for it did not materialize, but by the unprecedented increase in price. 
This was an instance of good fortune and not of foresight, as these 
operators had not anticipated such an advance. 

Qualifications for the Work of Prediction. — The prediction of 
future prices requires an uncommon combination of statistical, geol- 
ogical, engineering and business ability. Such a combination is so 

^ Petroleum Engineer, Johnson, Huntley and Somers. 
189 



190 PREDICTING FUTURE PRICES OF PETROLEUM 

uncommon that the work must ordinarily be done by collaboration. 
The man trained as an engineer may be qualified to assemble the 
data and to draw certain conclusions^ but he will need other valuable 
information which is to be gained only by consultation with those in 
other technical branches and on the executive staff. The fact that 
men too often rely on ill-supported guesses alone is reflected in mam- 
bankruptcies and ill-advised purchases and sales. Those purchasing 
production in the winter of 1920 and the spring of 1921, on a barrel- 
day price commensurate with the posted price, did so because, with 
the sun shining, the clouds on the horizon were overlooked. 

No matter how complete the information, an unquestionable 
future price cannot, of course, be fixed. A probable error in the 
estimates will undoubtedly exist, but it can be kept low enough to 
make a careful study of the course of past and future prices the duty 
of someone on the staff of every large oil company. 

Factors Affecting the Future Price. — The factors affecting the 
future price of oil may be divided into two groups, those studied 
historically, and those ascertained by a study of the present basis of 
the most important elements that will affect the future. In prac- 
tice, the interrelation is often such that classification is difficult. 
The historical data to be used are : 

1. Posted prices to date in the field under examination, and also 
posted prices in other fields which have an influence. These are 
more usable when plotted on a chart in conjunction with other in- 
formation shown by curves on the same ordinates, or even as written 
entries at the indicated dates. 

2. The annual production of petroleum by fields, (a) for the 
United States, (6) for countries competing in our markets, and (c) 
for the world. 

3. The annual exports and imports of the United States. 

4. The stocks of oil in storage at the end of each year. 

5. The annual amount of gasoline produced in refineries. 

6. The annual amount of natural-gas gasoline produced. 

7. The price of gasoline by years. 

8. The amount and price of the other principal refined prod- 
ucts. The prices of various products are not always proportionate- 
In 1921 the gasoline price was kept up proportionately higher than 
the market price for the other products. This threw a dispropor- 
tionate burden of the operating costs on the gasoline sales, as these 
fell off less than other sales. The changes in the price of the refined 



i 



FACTORS AFFECTING THE FUTURE PRICE 191 

products often antedate the price changes of petroleum. But the 
exact time of the changes in crude oil are often the result of field news 
concerning the large pools. 

9. The number of pleasure cars registered each year, with an 
analysis to determine the probable ^' point of saturation " for this 
type of car. 

10. The number of tractors in use each year. 

11. The change in the number of gallons of gasoline consumed per 
car and per tractor. 

12. The growth of the population of the United States. Future 
onsumption will depend largely on future population. 

13. The annual price and production of other important commod- 
ities, such as steel and wheat, or better index numbers based on many 
commodities, such as Bradstreet's, Dun's and the Bureau of Labor's. 
These are to be used for the study of the changing value of money. 

14. The change in Federal Reserve Bank Deposit indices. 

15. An exhaustive study of some other exhaustible resource that 
has passed through a condition or series of conditions similar to those 
that may be anticipated in the oil industry. 

16. Opinions of leading economists on the financial conditions. 
Much of this data has been compiled in convenient form in Pogue's 
" Economics of Petroleum." 

The non-historical data to be considered are : 

1. The oil reserves in this country available for the increasing 
number of wells that must be drilled. 

2. Probable future of fields in competing countries. 

3. Probability of governmental regulation, or even ownership, 
in the United States and in other countries. 

4. The amount of progress being made in the technology of shale- 
oil production. 

5. Status of competing motor fuels, present and potential. 

6. Possible changes in the type and power of gasoline engines. 

7. Possible adoption of other than gasoline-burning motors. 

8. Increased efficiency in refining processes, possibly resulting 
in greater yield of gasoline, or other more valuable products, per 
barrel of crude oil. 

9. Public sentiment toward conservation and the possible pro- 
hibition of fuel oil as a coal substitute. 

10. Change in automobile demand, due to a future increase of 
replacements in proportion to new owners. Fig. 26. 



192 



PREDICTING FUTURE PRICES OF PETROLEUM 



Use to be Made of the Factors. — The oil prices to date are, of 
course, the basis from which the study starts. For each fluctuation, 
the analyst should determine the contributing cause or causes, if 
possible. Those conditions that are likely to reappear in the oil 
industry should be given special attention, while those least likely to 



bOO 



200 



; \ 










. 




•,..-... 
















,. 






1 s 


I § 


. 


I i 


> o o 
5 S at 



Fig. 26. Bureau of Labor wholesale price indices showing effect of Civil War 
and World War on prices. 

influence price should be ignored. Of the latter, the depressions 
caused by the over-production at Glenn and Gushing are striking 
examples. The present demand, pipe-line and storage facilities, 
and the better knowledge of the oil market have altered the situation 
so that one such pool alone could never again have so depressing an 
effect on prices. 

The consideration of the annual production by fields for the 
United States, and by countries for those competing in our markets, 
serves various purposes. When compared with prices for the same 
period, it shows to what extent price changes are correlated with 
production changes. A correct allowance can then be made for the 
effect on the market of the production curve of new fields. 

The gasoline of all kinds produced each year, the amount sold per 
barrel of crude oil produced, and further, the gallons of gasoline and 
barrels of crude oil per motor vehicle, are essential figures. The 
country's 1920 production of petroleum amounted to less than 40 
barrels to a motor vehicle. The increase in the number of consumers 
of gasoline has been greater than the increase in production, and 
consequently a gradual decrease in the amount available to each 



REGIONAL INFLUENCES 193 

consumer is to be noted. Since there is a limit to the amount of gas- 
oUne that can be extracted from a barrel of oil, the result to be ex- 
pected is an increase in the efficiency of refinery methods and a decrease 
in motor requirements by the use of lower-grade fuels and substi- 
tutes, and a change in power and in types of motors. The average 
town car has much more power than is ever needed for town or city 
driving. There is also a large waste in consumption in the motors 
of cars designed for a speed of 55 to 100 miles an hour; perhaps at 
no time in the life of the car will it be called upon to attain anything 
like its maximum speed. The growth in the use of gasoline substi- 
tutes, even those that might be feasibly produced at this time at pres- 
ent prices, would necessarily be slow. The capital outlay required 
for the production of these substitutes is large, and consequently 
will not be made until successful ventures have removed the risk other- 
wise incurred. 

So far, a close correlation between the price movement of other 
commodities and that of crude oil can be noticed. With the change 
in the ratio of the amount produced to the amount consumed by this 
country, a greater departure from general price movements will be 
evident. The various index numbers from reliable sources should 
be followed. Commodity price movements of all kinds are best re- 
flected in these indices. 

It has recently been shown that the price of commodities bears 
a relation to bank deposits. The Federal Reserve System, having 
in control about a third of the banks of the country, supplies a suit- 
able source for these data.^ 

The opinions of the most reliable economists and students of fi- 
nance should not be overlooked. The conclusions of trade journals, 
however, should be more critically read. 

The shale-oil industry is not likely to produce oil in sufficient quan- 
tities to menace the price movement in the near future. In the first 
place, the initial investment required is enormous, and can therefore 
only be supplied slowly and in proportion as the price to be obtained 
stimulates the prospects. Furthermore, there will be no great supply 
of capital until such plants have proved themselves stable money-makers. 
The long period of necessary experimentation makes that date several 
years distant in the United States. 

Regional Influences. — The factors affecting price changes vary 
geographically: the producer in Mexico is particularly affected by the 
1 Working, Holbrook: The Annalist (June 27, 1921) Vol. 17, No. 441, pp. 686. 



194 PREDICTING FUTURE PRICES OF PETROLEUM 

political situation; the Appalachian producer is most affected by the 
gasoline market; the Calif ornian producer is chiefly concerned with 
the fuel oil prices, which depend greatly on the price paid in that 
state for coal, with which his fuel oil competes. At one time, prices 
in the Appalachian field had considerable influence on the price of 
all other grades of oil in the country, except the Californian oil. 
This price dominance of Appalachian grades, however, has dwindled, 
and now the price in the Mid-Continent field is the most import- 
ant. 

Normal Price and War Inflation. — The Bureau of Labor and 
other price indices show that the winter of 1915 was the starting-point 
for the increase in price arising from war conditions. Due to the 
1914-1915 oil depression, the price of crude oil in relation to 1913 is 
80, although the average of the Bureau of Labor's selected list of 
wholesale commodities is at 100 in November, 1915, as compared 
with 1913. Thereafter, the increase in both was the same, and it 
was not until the 1919-1920 increases that the price of crude oil 
recovered from its 20-point lag. 

The drop of Pennsylvania crude to $2.25 in 1921 is relatively on 
a par with the lowest 1915 price, $1.35. The prices of other commod- 
ities have not been deflated (January 1922) as much as have prices 
of crude oil. Labor and material costs are at about 150 as compared 
with 100 in 1913. 

A diagram. Fig. 27, shows that after the elimination of money 
inflation, the price was never over $2.50 for Pennsylvania grade ex- 
cept for about six months. The oil man sold his product, in relation 
to the 1913 price, 40 per cent below the average of other commodities 
during most of 1914-1915; thereafter the price of oil lagged 20 per 
cent behind, until May, 1920, when the price of oil recovered to the 
level of other products, only to drop below again in a few month-s. 
Operating and development costs are still on an inflated basis and are 
likely to maintain their present level, while the price of oil is deflated 
nearly to pre-war level. The indices are an aid in determining whether 
any increase or decrease is contrary to the general market conditions. 

Historical Influence on Increases in Price. — Perhaps no better 
method of observing the effect of over-production and other factors 
on price can be found than to plot the posted prices on quadrille 
paper and to mark the probable cause for each condition. As an 
illustration, a graph of Appalachian posted prices has been made, 
(Fig. 28). On this graph, one should note the following points: 



PREDICTIONS FOR LONG AND SHORT PERIODS 



195 



1. After the peak of Appalachian production had been passed, 
a rapid general increase in price followed, but it was kept from too 
extreme a swing by the discovery of new oil-bearing regions. 

2. Price changes take effect after a production change has been 
in progress some time. 



















































EFFECT OF WAR PRICE INFLATION 
ON 
PENNA. CRUDE PRICE 














6 00 














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5 00 


































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4.00 
















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by Index 






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B of L. Commodity Indes 








































1913 Average Wholesale Commodity Price = looj 



3.00 



2.00 



1.00 



1912 1913 1914 1915 



1916 1917 1918 1919 1920 1921 

Fig. 27. 



3. The effect on price of single new pools is not so depressing nor 
so persistent as it formerly was. The Eldorado pool in Kansas 
and the Eldorado pool in Arkansas may be taken as illustrations. 

4. The price of oil was deflated more than that of any other of 
the principal commodities, after the Great War inflation. 

5. The troughs and crests of minor oscillations have been spaced 
at about six-year intervals, but there is no reason to postulate a con- 
tinuance of this particular interval. The graph is not complete, for 
oil in storage and in producers' tanks, production, exports and many 
other factors must be studied in connection with each large fluc- 
tuation in price. After one has found the line of normal increase for 
any particular field, the next step is to determine how great any 
deviation therefrom in the future is likely to be. 

Predictions for Long and Short Periods. — If the aim is to pos- 
tulate the price for the immediate future, minor oscillations from the 



196 



PREDICTING FUTURE PRICES OF PETROLEUM 



Price-Dollars 



1887 
1888 




^ 




























1839 
1890 




£ 


i 
















a 










1891 
1892 




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1893 
1894 




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1895 
1896 


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1897_ 
1898 




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^ Disturbed Market because of Panic 






1899 
1900 






Ip 


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1901 
1902 






% 




■"* Spindle t.p Field Opened Up- 
Ic esute year oaa.&Kan 


began to produce 


i Prices 
3f Average In 
d Price abov 
d Price below 
are equal | 




1903 
1904 






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lir: 


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« Production West of Mississippi passes that in th 




1905 
190C 






* 


I 


La.becomes a prominent l-rodaction 
^— Glenn Pool Discovered 




in 




■1907 
1908 








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Storage "" 






1909 
1910 


Price DertessiOD by p 

Glenn Pool, Tesas & = 

La. yields ^ 


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1912 






, Cushing Pool Discovered 














1913 


Price Depression by J 
CuGbiDj Over. ^ 
proJui;lion 




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,1914 






1915 
1910 


% 

> 


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^ VTar Inflation Eojan in U.S. 

II .^^ Eldorado Kan. -Pool effect on Price 










1917_ 

1918 












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-- 


^ Price Hdd Flat at Suggc5(io3 of U S. Gov't 






1919 






1 
















To 


il Inflation equivalent to 1 




1 




1921 

1922 




t 











Posted Prices 




Whjleiale Prices of All 
Commodities- B.of Ulndioes 


% 




n ^C 


1923 
1924 










li! 
















1925 
192$ 






% 




1 


•"1; 



















Price Dollars 



Fig. 28. 



1 



THE AVERAGE LINE OF INCREASE 197 

average line and present market conditions should be the controlling 
factors. The price may be above or below the average line at the 
start, and consequently may affect the production to be appraised 
in the early years. For the purpose of ascertaining the rate of change 
for long periods of years, an average line, based on history to date, 
and modified by probable influencing factors, is advisable. 

The Average Line of Increase. — The average line of increase is 
not always a straight line. From the time of the peak of production 
until that of the development of new fields, the Appalachian price 
indicated the probability of an exponential rate of increase. Where 
such cases are evident, arithlog paper offers a more satisfactory means 
of making an average line. It is generally best to use quadrille 
paper first, to determine the exact position of the line, and then to 
transfer the information to the arithlog paper, if necessary. That an 
exponential rate of increase will occur in the future, until shale oil 
becomes an important factor, is not at all improbable in view of the 
present supply and market. 



CHAPTER XXII 

THE OUTLOOK IN THE OIL INDUSTRY 

The situation of the oil industry in the United States, in the 
summer of 1921, was one of over-production. Although the de- 
mand for refined products was slightly greater than in 1920, the in- 
crease in demand was not proportionate to the increase in production; 
yet neither the production nor the consumption in 1921 was what 
might have been expected at the normal rate of increase. 

emand. — The real situation seems to have been a slackening 
of the normal increase in consumption, due to 

1. The general industrial depression both in the United States 
and abroad, and 

2. A decline in the former rate of increase in the use of auto- 
mobiles and trucks. 

The demand of the immediately preceding years for automo- 
biles was abnormally large, since, during the war, practically the 
entire supply had necessarily been diverted to war needs rather than 
to general business or pleasure purposes. These latter needs accord- 
ingly accumulated, till in 1919 and 1920 the demand was fairly well 
filled by the various automobile factories. That abnormal rate of 
increase could not reasonably be expected to be maintained, even if 
the country had not suffered a financial depression in 1921. 

Supply. — At the same time, there was a domestic over-supply of 
petroleum and its products, brought about by several factors: 

1. Improvements in methods of refining yielded a larger gasoline 
fraction. 

2. An excess of oil had been put in storage, as the demand had 
not equaled what the producers anticipated. 

3. Exports of oil had decreased, largely on account of the unfavor- 
able exchange situation. 

4. Very large quantities of crude oil were imported from Mexico. 

Price. — The price for crude oil in the summer of 1921 had fallen 
below the index for general commodity prices. As money rates, 
labor, and prices for materials still showed considerable war inflation, 

198 



^ 



PRICE 199 

this discrepancy acted as a positive discrimination against the oil- 
producer. In Oklahoma, for instance, he was actually receiving less 
value for his oil at $1 per barrel, in 1921, than he was when he sold it 
at 35 cents during most of the period of over-production in 1915, 
when the Gushing pool came in. 

The recovery of the oil market came (October 1, 1921) when the 
Eldorado pool, Arkansas, first showed a marked decline in production. 
The large size of the wells and the indefiniteness of the area of the 
pool had indicated a probability of increasing over-production, until 
the developments of September showed that henceforth no increase 
could be expected from this pool. The production at Mexia, Texas, 
coming on so much more rapidly (December, 1921) than had been 
expected, led to the reaction of January 1922. 

Looking beyond the general period of 1921-1922, a much higher 
price for oil is indicated. The main factors working to this end are 
the following: 

1. Industrial consumption, both in the United States and in 
Europe, is increasing. 

2. There will be a decline in present production. Approximately 
35 per cent of the present domestic production is less than one year 
old, and an additional 15 per cent is less than two years old. This 
will rapidly decline, and more new drilling will be necessary to main- 
tain the production than is likely to be undertaken with constantly 
increasing hazards and depth. 

3. The present over-production is the result of five years of active 
wildcatting. When the present newer pools have declined, it will 
probably take a longer time to develop an equal amount of new pro- 
duction, as at the present time wildcatting is less active, and so many 
of the prospects that had been eagerly looked forward to have been 
dry holes. Sands offering poorer and poorer chances are being 
drilled (Fig. 29). Large areas are being eliminated as possible oil- 
producing fields. 

4. Domestic oil-producers will profit by the increased cost of 
foreign production. The extraordinary producing conditions in 
Mexico, resulting from the phenomenal yields per well and the possi- 
bility of draining large areas with one well, are not likely to be du- 
plicated after the present Dos Bocas-Alamo field is exhausted in the 
near future; and, after 1922, foreign producers with higher costs will 
require a higher price, just as in the case of domestic operators. 

5. In 1923, Mexican exports will probably total much less than 



200 



THE OUTLOOK IN THE OIL INDUSTRY 



70 




















































CHART 
on 
Annual Dry Hole Percentage 












fiO 








































AH wells 

— Offset Wells 












')0 






50^ Dry Holes -n/°'^ °°® Company -Greene. Washington. Westmoreland | 




























& Fayette Co./\ Penna. 


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1901 1902 1903 1904 1905 1306 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 

Year 

Fig. 29. 



2700 
2600 
2500 
2400 
2300 
+3 2200 

4) 

£ 2100 

a 
o 

^ 2000 
1900 
1800 
1700 
1600 
1500 



























































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1 


























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New Wehs Drilled 














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1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1018 1919 1920 

Fig. 30. 



PRICE 201 

the daily average for 1920. This oil will be produced under such 
conditions and taxes that it will scarcely compete with production 
in the United States. 

6. The oil market will be stabilized. As the market for oil 
products becomes greater, and oil is utilized more universally for 
many needs, and as the producing districts are more widely distributed 
throughout the world, with an ever-widening net of pipe lines, it will 
become increasingly difficult to break the oil market by bringing in 
new pools. 

7. The necessity of drilling greater depths to reach producing 
sands will necessitate an increase in the market price for oil (Fig. 30). 

8. The production of gasoline substitutes, such as shale oil, oil 
from coal, alcohol, etc., requires an enormous investment of capital, 
following a great deal of expensive preliminary experiment. Cap- 
italists will be reluctant to go into such ventures until they are con- 
vinced that the oil market is past the danger of demoralization by 
the occasional discovery of large pools of oil, as during 1921 and before. 
These considerations make it unlikely that the market for petroleum 
products will be seriously affected, for several years, by competition 
from this source. 



APPENDIX 

OIL LAND ACT OF FEBRUARY 25, 1920 
[PUBLIC — NO. 146 — 66TH CONGRESS.] 

[S. 2775.] 

AN ACT To promote tlie mining of coal, phosphate, oil, oil shale, gas, and sodium 

on the pubUc domain. 

Be it enacted by the Senate and House of Representatives of the United States of 
America in Congress assembled, That deposits of coal, phosphate, sodium, oil, oil 
shale, or gas, and lands containing such deposits owned by the United States, in- 
cluding those in national forests, but excluding lands acquired under the act known 
as the Appalachian Forest act, approved March 1, 1911 (Thirty-sixth Statutes, 
page 961), and those in national parks, and in lands withdrawn or reserved for 
miUtary or naval uses or purposes, except as hereinafter provided, shall be subject 
to disposition in the form and manner provided by this act to citizens of the United 
States, or to any association of such persons, or to any corporation organized under 
the laws of the United States, or of any State or Territory thereof, and in the case 
of coal, oil, oil shale, or gas, to municipahties : Provided, That the United States 
reserves the right to extract helium from all gas produced from lands permitted, 
leased, or otherwise granted under the provisions of this act, under such rules and 
regulations as shall be prescribed by the Secretary of the Interior: Provided further, 
That in the extraction of helium from gas produced from such lands, it shall be so 
extracted as to cause no substantial delay in the delivery of gas produced from the 
well to the purchaser thereof: And provided further , That citizens of another coim- 
try, the laws, customs, or regulations of which deny similar or like privileges to 
citizens or corporations of this country, shall not by stock ownership, stock holding, 
or stock control own any interest in any lease acquired under the provisions of this 
act. 

[Sections 2 to 8, inclusive, relate to coal.] 

[Sections 9 to 12, inclusive, relate to phosphates.] 

OIL AND GAS 

Sec. 13. That the Secretary of the Interior is hereby authorized, under such 
necessary and proper rules and regulations as he may prescribe, to grant to any 
apphcant qualified under this Act a prospecting permit, which shall give the ex- 
clusive right, for a period not exceeding two years, to prospect for oil or gas upon 
not to exceed two thousand five hundred and sixty acres of land wherein such de- 
posits belong to the United States and are not within any known geological structure 
of a producing oil or gas field upon condition that the permittee shall begin drilhng 
operations within six months from the date of the permit, and shall, within one year 

202 






APPENDIX 203 

from and after the date of permit, drill one or more wells for oil or gas to a depth of 
not less than five hundred feet each, unless valuable deposits of oil or gas shall be 
sooner discovered, and shall, within two years from date of the permit, drill for oil 
or gas to an aggregate depth of not less than two thousand feet unless valuable 
deposits of oil or gas shall be sooner discovered. The Secretary of the Interior may, 
if he shall find that the permittee has been unable with the exercise of diligence to 
test the land in the time granted by the permit, extend any such permit for such time, 
not exceeding two years, and upon such conditions as he shall prescribe. Whether 
the lands sought in any such application and permit are surveyed or unsurveyed the 
appUcant shall, prior to fiUng his application for permit, locate such lands in a reas- 
onably compact form and according to the legal subdivisions of the public land 
surveys if the land be surveyed; and in an approximately square or rectangular 
tract if the land be an unsurveyed tract, the length of which shall not exceed two and 
one-half times its width, and if he shall cause to be erected upon the land for which 
a permit is sought a monument not less than four feet high, at some conspicuous 
place thereon, and shall post a notice in writing on or near said monument, stating 
that an application for permit will be made within thirty days after date of posting 
said notice, the name of the applicant, the date of the notice, and such a general 
description of the land to be covered by such permit by reference to courses and 
distances from such monument and such other natural objects and permanent 
monuments as will reasonably identify the land, stating the amount thereof in 
acres, he shall during the period of thirty days following such marking and posting, 
be entitled to a preference right over others to a permit for the land so identified. 
The applicant shall, within ninety days after receiving a permit, mark each of the 
corners of the tract described in the permit upon the ground with substantial monu- 
ments, so that the boundaries can be readily traced on the ground, and shall post 
in a conspicuous place upon the lands a notice that such permit has been granted 
and a description of the lands covered thereby: Provided, That in the Territory 
of Alaska prospecting permits not more than five in number may be granted to any 
qualified appHcant for periods not exceeding four years, actual drilling operations 
shall begin within two years from date of permit, and oil and gas wells shall be drilled 
to a depth of not less than five hundred feet, unless valuable deposits of oil or gas 
shall be sooner discovered, within three years from date of the permit and to an 
aggregate depth of not less than two thousand feet unless valuable deposits of oil 
or gas shall be sooner discovered, within four years from date of permit: Pro- 
vided further, That in said Territory the applicant shall have a preference right over 
others to a permit for land identified by temporary monuments and notice posted 
on or near the same for six months following such marking and posting, and upon 
receiving a permit he shall mark the corners of the tract described in the permit upon 
the ground with substantial monuments within one year after receiving such permit. 
Sec. 14. That upon establishing to the satisfaction of the Secretary of the 
Interior that valuable deposits of oil or gas have been discovered within the limits 
of the land embraced in any permit, the permittee shall be entitled to a lease, for 
one-fourth of the land embraced in the prospecting permit: Provided, That the 
permittee shall be granted a lease for as much as one hundred and sixty acres of 
said lands, if there be that number of acres within the permit. The area to be 
selected by the permittee shall be in compact form and, if surveyed, to be described 
by the legal subdivisions of the pubHc-land surveys; if unsurveyed, to be surveyed 



204 APPENDIX 

by the Government at the expense of the appHcant for lease in accordance with 
rules and regulations to be prescribed by the Secretary of the Interior, and the lands 
leased shall be conformed to and taken in accordance with the legal subdivisions 
of such surveys; deposits made to cover expense of surveys shall be deemed ap- 
propriated for that purpose, and any excess deposits may be repaid to the person 
or persons making such deposit or their legal representatives. Such leases shall be 
for a term of twenty years upon a royalty of 5 per centum in amount or value of 
the production and the annual payment in advance of a rental of $1 per acre, the 
rental paid for any one year to be credited against the royalties as they accrue for 
that year, with the right of renewal as prescribed in section 17 hereof. The per- 
mittee shall also be entitled to a preference right to a lease for the remainder of the 
land in his prospecting permit at a royalty of not less than 12| per centum in amount 
or value of the production, and under such other conditions as are fixed for oil or 
gas leases in this act, the royalty to be determined by competitive bidding or fixed 
by such other method as the Secretary may by regulations prescribe: Provided, 
That the Secretary shall have the right to reject any or all bids. 

Sec. 15. That until the permittee shall apply for lease to the one quarter of 
the permit area heretofore provided for he shall pay to the United States 20 per 
centum of the gross value of all oil or gas secured by him from the lands embraced 
within his permit and sold or otherwise disposed of or held by him for sale or other 
disposition. 

Sec. 16. That all permits and leases of lands containing oil or gas, made or 
issued under the provisions of this act, shall be subject to the condition that no 
wells shall be drilled within two hundred feet of any of the outer boundaries of the 
lands so permitted or leased, unless the adjoining lands have been patented or the 
title thereto otherwise vested in private owners, and to the further condition that 
the permittee or lessee will, in conducting his explorations and mining operations, 
use all reasonable precautions to prevent waste of oil or gas developed in the land, 
or the entrance of water through wells drilled by him to the oil sands or oil-bearing 
strata, to the destruction or injury of the oil deposits. Violations of the provisions 
of this section shall constitute grounds for the forfeiture of the permit or lease, to 
be enforced through appropriate proceedings in courts of competent jurisdiction. 

Sec. 17. That all unappropriated deposits of oil or gas situated within the 
known geologic structure of a producing oil or gas field and the unentered lands 
containing the same, not subject to preferential lease, may be leased by the Secretary 
of the Interior to the highest responsible bidder by competitive bidding under gen- 
eral regulations to qualified applicants in areas not exceeding six hundred and 
forty acres and in tracts which shall not exceed in length two and one-half times 
their width, such leases to be conditioned upon the payment by the lessee of such 
bonus as may be accepted and of such royalty as may be fixed in the lease, which 
shall not be less than 12^ per centum in amount or value of the production, and the 
payment in advance of a rental of not less than $1 per acre per annum thereafter 
during the continuance of the lease, the rental paid for any one year to be credited 
against the royalties as they accrue for that year. Leases shall be for a period of 
twenty years, with the preferential right in the lessee to renew the same for successive 
periods of ten years upon such reasonable terms and conditions as may be prescribed 
by the Secretary of the Interior, unless otherwise provided by law at the time of 
the expiration of such periods. Whenever the average daily production of any oil 



APPENDIX 205 

well shall not exceed ten barrels per day, the Secretary of the Interior is authorized 
to reduce the royalty on future production when in his judgment the wells can not 
be successfully operated upon the royalty fixed in the lease. The provisions of this 
paragraph shall apply to all oil and gas leases made under this act. 

Sec. 18. That upon relinquishment to the United States, filed in the General 
Land Office within six months after the approval of this act, of all right, title, and 
interest claimed and possessed prior to July 3, 1910, and continuously since by the 
claimant or his predecessor in interest under the preexisting placer mining law to 
any oil or gas bearing land upon which there has been drilled one or more oil or gas 
wells to discovery embraced in the Executive order of withdrawal issued September 
27, 1909, and not within any naval petroleum reserve, and upon payment as royalty 
to the United States of an amount equal to the value at the time of production of 
one-eighth of all the oil or gas already produced except oil or gas used for produc- 
tion purposes on the claim, or unavoidably lost, from such land, the claimant, or 
his successor, if in possession of such land, undisputed by any other claimant prior 
to July 1, 1919, shall be entitled to a lease thereon from the United States for a 
period of twenty years, at a royalty of not less than 12^ per centum of all the oil or 
gas produced except oil or gas used for production purposes on the claim, or unavoid- 
ably lost: Provided, That not more than one-half of the area, but in no case to ex- 
ceed three thousand two hundred acres, within the geologic oil or gas structure of 
a producing oil or gas field shall be leased to any one claimant under the provision 
of this section when the area of such geologic oil structure exceeds six hundred and 
forty acres. Any claimant or his successor, subject to this limitation, shall, however, 
have the right to select and receive the lease as in this section provided for that 
portion of his claim or claims equal to, but not in excess of, said one-half of the area 
of such geologic oil structure, but not more than three thousand two hundred acres. 

AU such leases shall be made and the amount of royalty to be paid for oil and 
gas produced, except oil or gas used for production purposes on the claim, or unavoid- 
ably lost, after the execution of such lease shall be fixed by the Secretary of the 
Interior under appropriate rules and regulations: Provided, however. That as to 
all Hke claims situate within any naval petroleum reserve the producing wells there- 
on only shall be leased, together with an area of land sufficient for the operation 
thereof, upon the terms and payment of royalties for past and future production 
as herein provided for in the leasing of claims. No wells shall be drilled in the land 
subject to this provision within six hundred and sixty feet of any such leased well 
without the consent of the lessee: Provided, however, That the President may, in 
his discretion, lease the remainder or any part of any such claim upon which such 
wells have been drilled, and in the event of such leasing said claimant or his successor 
shall have a preference right to such lease: And -provided further , That he may per- 
mit the drUling of additional wells by the claimant or his successor within the lim- 
ited area of six hundred and sixty feet theretofore provided for upon such terms and 
conditions as he may prescribe. 

No claimant for a lease who has been guilty of any fraud or who had knowl- 
edge or reasonable grounds to know of any fraud, or who has not acted honestly 
and in good faith, shall be entitled to any of the benefits of this section. 

Upon the delivery and acceptance of the lease, as in this section provided, all 
suits brought by the Government affecting such lands may be settled and adjusted 
in accordance herewith and all moneys impounded in such suits or under the Act 



206 APPENDIX 

entitled "An Act to amend an Act entitled 'An Act to protect the locators in good 
faith of oil and gas lands who shall have effected an actual discovery of oil or gas 
on the public lands of the United States, or their successors in interest, ' approved 
March 2, 1911," approved August 25, 1914 (Thirty-eighth Statutes at Large, page 
708), shall be paid over to the parties entitled thereto. In case of conflicting claim- 
ants for leases under this section, the Secretary of the Interior is authorized to grant 
leases to one or more of them as shall be deemed just. All leases hereunder shall 
inure to the benefit of the claimant and all persons claiming through or under him 
by lease, contract, or otherwise, as their interests may appear, subject, however, to 
the same limitation as to area and acreage as is provided for claimant in this sec- 
tion: Provided, That no claimant acquiring and interest in such lands since Sep- 
tember 1, 1919, from a claimant on or since said date claiming or holding more than 
the maximum allowed claimant under this section shall secure a lease thereon or 
any interest therein, but the inhibition of this proviso shall not apply to an exchange 
of any interest in such lands made prior to the 1st day of January, 1920, which did 
not increase or reduce the area or acreage held or claimed in excess of said maxi- 
mum by either party to the exchange : Provided further, That no lease or leases under 
this section shall be granted, nor shall any interest therein inure, to any person, asso- 
ciation, or corporation for a greater aggregate area or acreage than the maximum 
in this section provided for. 

Sec. 18a. That whenever the vaHdity of any gas or petroleum placer claim 
under preexisting law to land embraced in the Executive order of withdrawal issued 
September 27, 1909, has been or may hereafter be drawn in question on behalf of 
the United States in any departmental or judicial proceedings, the President is 
hereby authorized at any time within twelve months after the approval of this 
Act to direct the compromise and settlement of any such controversy upon such 
terms and conditions as may be agreed upon, to be carried out by an exchange or 
division of land or division of the proceeds of operation. 

Sec. 19. That any person who on October 1, 1919, was a bona fide occupant 
or claimant of oil or gas lands under a claim initiated while such lands were not with- 
drawn from oil or gas location and entry, and who had previously performed all 
acts under then existing laws necessary to valid locations thereof except to make 
discovery and upon which discovery had not been made prior to the passage of this 
act, and who has performed work or expended on or for the benefit of such locations 
an amount equal in the aggregate of $250 for each location if apphcation therefor 
shall be made within six months from the passage of this act shall be entitled to 
prospecting permits thereon upon the same terms and conditions, and hmitations 
as to acreage, as other permits provided for in this act, or where any such person 
has heretofore made such discovery, he shall be entitled to a lease thereon under 
such terms as the Secretary of the Interior may prescribe unless otherwise provided 
for in section 18 hereof: Provided, That where such prospecting permit is granted 
upon lands within any known geologic structure of a producing oil or gas field, the 
royalty to be fixed in any lease thereafter granted thereon or any portion thereof 
shall be not less than 12-2- per centum of all the oil or gas produced except oil or gas 
used for production purposes on the claim, or unavoidably lost: Provided, however, 
That the provisions of this section shall not apply to lands reserved for the use of 
the Navy: Provided, however, That no claimant for a permit or lease who has been 
guilty of any fraud or who had knowledge or reasonable grounds to know of any 



APPENDIX 207 

fraud, or who has not acted honestly and in good faith, shall be entitled to any of 
the benefits of this section. 

All permits or leases hereunder shall inure to the benefit of the claimant and all 
persons cla imin g through or under him by lease, contract, or otherwise, as their 
interests may appear. 

Sec. 20. In the case of lands bona fide entered as agricultural and not with- 
drawn or classified as mineral at the time of entry, but not including lands claimed 
under any railroad grant, the entryman or patentee, or assigns, where assignment 
was made prior to January 1, 1918, if the entry has been patented with the mineral 
right reserved, shall be entitled to a preference right to a permit and to a lease, as 
herein provided, in case of discovery; and within an area not greater than a town- 
ship such entryman and patentees or assigns holding restricted patents may combine 
their holdings, not to exceed two thousand five hundred and sixty acres, for the pur- 
pose of making joint apphcation. Leases executed under this section and embrac- 
ing only lands so entered shall provide for the payment of a royalty of not less than 
12^ per centum as to such areas within the permit as may not be included within the 
discovery lease to which the permittee is entitled imder section 14 hereof. 

[Section 21 relates to oil shale.] 

ALASKA OIL PROVISO 

Sec. 22. That any bona fide occupant or claimant of oil or gas bearing lands 
in the Territory of Alaska, who, or whose predecessors in interest, prior to with- 
drawal had complied otherwise with the requirements of the mining laws, but had 
made no discovery of oil or gas in wells and who prior to withdrawal had made 
substantial improvements for the discovery of oil or gas on or for each location or 
had prior to the passage of this act expended not less than $250 in improvements 
on or for each location shall be entitled, upon relinquishment or surrender to the 
United States within one year from the date of this act, or within six months after 
final denial or withdrawal of application for patent, to a prospecting permit or per- 
mits, lease or leases, under this act covering such lands, not exceeding five per- 
mits or leases in number and not exceeding an aggregate of one thousand two hun- 
dred and eighty acres in each : Provided, That leases in Alaska under this act whether 
as a result of prospecting permits or otherwise shall be upon such rental and roy- 
alties as shall be fixed by the Secretary of the Interior and specified in the lease, and 
be subject to readjustment at the end of each twenty-year period of the lease: Pro- 
vided further, That for the purpose of encouraging the production of petroleum prod- 
ucts in Alaska the Secretary may, in his discretion, waive the payment of any rental 
or royalty not exceeding the first five years of any lease. 

No claimant for a lease who has been guilty of any fraud or who had knowl- 
edge or reasonable grounds to know of any fraud, or who has not acted honestly and 
in good faith, shall be entitled to any of the benefits of this section. 

[Sections 23, 24, and 25 relate to sodium.] 

GENERAL PROVISIONS APPLICABLE TO COAL, PHOSPHATE, SODIUM, 
OIL, OIL SHALE, AND GAS LEASES 

Sec. 26. That the Secretary of the Interior shall reserve and may exercise 
the authority to cancel any prospecting permit upon failure by the permittee to 
exercise due diligence in the prosecution of the prospecting work in accordance with 



208 APPENDIX 

the terms and conditions stated in the permit, and shall insert in every such permit 
issued under the provisions of this act appropriate provision for its cancellation by 
him. 

Sec. 27. That no person, association, or corporation, except as herein pro- 
vided, shall take or hold more than one coal, phosphate, or sodium lease during the 
life of such lease in any one State; no person, association, or corporation shall take 
or hold, at one time, more than three oil or gas leases granted hereunder in any one 
State, and not more than one lease within the geologic structure of the same pro- 
ducing oil or gas field; no corporation shall hold any interest as a stockholder of 
another corporation in more than such number of leases; and no person or corpora- 
tion shall take or hold any interest or interests as a member of an association or 
associations or as a stockholder of a corporation or corporations holding a lease 
under the provisions hereof, which, together with the area embraced in any direct 
holding of a lease under this act, or which, together with any other interest or in- 
terests as a member of an association or associations or as a stockholder of a cor- 
poration or corporations holding a lease under the provisions hereof, for any kind 
of mineral leased hereunder, exceeds in the aggregate an amount equivalent to the 
maximum number of acres of the respective kinds of minerals allowed to any one 
lessee under this act. Any interests held in violation of this act shall be forfeited 
to the United States by appropriate proceedings instituted by the Attorney General 
for that purpose in the United States district court for the district in which the 
property, or some part thereof, is located, except that any ownership or interest 
forbidden in this act which may be acquired by descent, will, judgment, or decree 
may be held for two years and not longer after its acquisition: Provided, That 
nothing herein contained shall be construed to limit sections 18, 18a, 19, and 22, 
or to prevent any number of lessees under the provisions of this act from combining 
their several interests so far as may be necessary for the purposes of constructing 
and carrying on the business of a refinery, or of estabhshing and constructing as a 
common carrier a pipe line or Hues of railroads to be operated and used by them 
jointly in the transportation of oil from their several wells, or from the wells of 
other lessees under this act, or the transportation of coal: Provided further, That 
any combination for such purpose or purposes shall be subject to the approval of 
the Secretary of the Interior on application to him for permission to form the same: 
And provided further, That if any of the lands or deposits leased under the pro- 
visions of this act shall be subleased, trusteed, possessed, or controlled by any de- 
vice permanently, temporarily, directly, indirectly, tacitly, or in any manner what- 
soever, so that they form part of, or are in anywise controlled by any combination 
in the form of an unlawful trust, with consent of lessee, or form the subject of any 
contract or conspiracy in restraint of trade in the mining or selling of coal, phosphate, 
oil, oil shale, gas, or sodium entered into by the lessee, or any agreement or under- 
standing, written, verbal, or otherwise to which such lessee shall be a party, of 
which his or its output is to be or become the subject, to control the price or prices 
thereof or of any holding of such lands by any individual, partnership, association, 
corporation, or control in excess of the amounts of lands provided in this act, the 
lease thereof shall be forfeited by appropriate court proceedings. 

Sec. 28. That rights of way through the public lands, including the forest 
reserves, of the United States are hereby granted for pipe-line purposes for the trans- 
portation of oil or natural gas to any applicant possessing the qualifications pro- 



APPENDIX 209 

vided in section 1 of this Act, to the extent of the ground occupied by the said pipe 
line and twenty-five feet on each side of the same under such regulations as to sur- 
vey, location, application, and use as may be prescribed by the Secretary of the 
Interior and upon the express condition that such pipe Unes shall be constructed, 
operated, and maintained as common carriers: Provided, That the Government 
shall in express terms reserve and shall provide in every lease of oil lands hereunder 
that the lessee, assignee, or beneficiary, if owner, or operator or owner of a controlling 
interest in any pipe fine or of any company operating the same which may be op- 
erated accessible to the oil derived from lands under such lease, shall at reasonable 
rates and without discrimination accept and convey the oil of the Government or 
of any citizen or company not the owner of any pipe Une, operating a lease or pur- 
chasing gas or oil under the provisions of this Act: Provided further , That no right 
of way shall hereafter be granted over said lands for the transportation of oil or 
natural gas except under and subject to the provisions, limitations, and conditions 
of this section. Failure to comply with the provisions of this section or the regula- 
tions prescribed by the Secretary of the Interior shall be ground for forfeiture of 
the grant by the United States district court for the district in which the property, 
or some part thereof, is located in an appropriate proceeding. 

Sec. 29. That any permit, lease, occupation, or use permitted under this Act 
shall reserve to the Secretary of the Interior the right to permit upon such terms as 
he may determine to be just, for joint or several use, such easements or rights of 
way, including easements in tunnels upon, through, or in the lands leased, occupied, 
or used as may be necessary or appropriate to the working of the same, or of other 
lands containing the deposits described in this Act, and the treatment and shipment 
of the products thereof by or under authority of the Government, its lessees, or 
permittees, and for other public purposes: Provided, That said Secretary, in his 
discretion, in making any lease under this Act, may reserve to the United States the 
right to lease, sell, or otherwise dispose of the surface of the lands embraced within 
such lease under existing law or laws hereafter enacted, in so far as said surface is 
not necessary for use of the lessee in extracting and removing the deposits therein: 
Provided further, That if such reservation is made it shall be so determined before 
the offering of such lease: And -provided further , That the said Secretary, during the 
life of the lease, is authorized to issue such permits for easements herein provided 
to be reserved. 

Sec. 30. That no lease issued under the authority of this act shall be assigned 
or sublet, except with the consent of the Secretary of the Interior. The lessee may, 
in the discretion of the Secretary of the Interior, be permitted at any time to make 
WTitten relinquishment of all rights under such a lease, and upon acceptance thereof 
be thereby reheved of all future obligations under said lease, and may with like con- 
sent surrender any legal subdivision of the area included within the lease. Each 
lease shall contain provisions for the purpose of insuring the exercise of reasonable 
dihgence, skill, and care in the operation of said property; a provision that such 
rules for the safety and welfare of the miners and for the prevention of undue wa^te 
as may be prescribed by said Secretary shall be observed, including a restriction of 
the workday to not exceeding eight hours in any one day for underground workers 
except in cases of emergency; provisions prohibiting the employment of any boy 
under the age of sixteen or the employment of any girl or woman, without regard to 
age, in any mine below the surface; provisions securing the workmen complete 



210 APPENDIX 

freedom of purchase; provision requiring the payment of wages at least twice a 
month in lawful money of the United States, and providing proper rules and regula- 
tions to insure the fair and just weighing or measurement of the coal mined by each 
miner, and such other provisions as he may deem necessary to insure the sale of the 
production of such leased lands to the United States and to the public at reason- 
able prices, for the protection of the interests of the United States, for the prevention 
of monopoly, and for the safeguarding of the pubUc welfare : Provided, That none of 
such provisions shall be in conflict with the laws of the State in which the leased 
property is situated. 

Sec. 31. That any lease issued under the provisions of this act may be for- 
feited and canceled by an appropriate proceeding in the United States district court 
for the district in which the property, or some part thereof, is located, whenever the 
lessee fails to comply with any of the provisions of this act, of the lease, or of the 
general regulations promulgated under this act and in force at the date of the lease; 
and the lease may provide for resort to appropriate methods for the settlement of 
disputes or for remedies for breach of specified conditions thereof. 

Sec. 32. That the Secretary of the Interior is authorized to prescribe necessary 
and proper rules and regulations and to do any and all things necessary to carry out 
and accomplish the purposes of this act, also to fix and determine the boundary 
lines of any structure, or oil or gas field, for the purposes of this act: Provided, 
That nothing in this act shall be construed or held to affect the rights of the States 
or other local authority to exercise any rights which they may have, including the 
right to levy and collect taxes upon improvements, output of mines, or other rights, 
property, or assets of any lessee of the United States. 

Sec. 33. That all statements, representations, or reports required by the Secre- 
tary of the Interior under this act shall be upon oath, unless otherwise specified 
by him, and in such form and upon such blanks as the Secretary of the Interior 
may require. 

Sec. 34. That the provisions of this act shall also apply to all deposits of coal, 
phosphate, sodium, oil, oil shale, or gas in the lands of the United States, which lands 
may have been or may be disposed of under laws reserving to the United States 
such deposits, with the right to prospect for, mine, and remove the same, subject 
to such conditions as are or may hereafter be provided by such laws reserving such 
deposits. 

Sec. 35. That 10 per centum of all money received from sales, bonuses, roy- 
alties, and rentals under the provisions of this act, excepting those from Alaska, 
shall be paid into the Treasury of the United States and credited to miscellaneous 
receipts; for past production 70 per centum, and for future production 52^ per 
centum of the amounts derived from such bonuses, royalties, and rentals shall be 
paid into, reserved, and appropriated as a part of the reclamation fund created by 
the act of Congress, known as the reclamation act, approved June 17, 1902, and for 
past production 20 per centum, and for future production 37^ per centum of the 
amounts derived from such bonuses, royalties, and rentals shall be paid by the 
Secretary of the Treasury after the expiration of each fiscal year to the State within 
the boundaries of which the leased lands or deposits are or were located, said moneys 
to be used by such State or subdivisions thereof for the construction and mainte- 
nance of public roads or for the support of public schools or other pubhc educational 
institutions, as the legislature of the State may direct: Provided, That all moneys 



APPENDIX 211 

which may accrue to the United States under the provisions of this act from lands 
within the naval petroleum reserves shall be deposited in the Treasury as "Mis- 
cellaneous receipts." 

Sec. 36. That all royalty accruing to the United States under any oil or gas 
lease or permit under this act on demand of the Secretary of the Interior shall be 
paid in oil or gas. 

Upon granting any oil or gas lease under this act, and from time to time there- 
after during said lease, the Secretary of the Interior shall, except whenever in his 
judgment it is desirable to retain the same for the use of the United States, offer 
for sale for such period as he may determine, upon notice and advertisement on 
sealed bids or at pubhc auction, all royalty oil and gas accruing or reserved to the 
United States under such lease. Such advertisement and sale shall reserve to the 
Secretary of the Interior the right to reject all bids whenever within his judgment 
the interest of the United States demands; and in cases where no satisfactory bid 
is received or where the accepted bidder fails to complete the purchase, or where 
the Secretary of the Interior shall determine that it is unwise in the pubhc interest 
to accept the offer of the highest bidder, the Secretary of the Interior, within his 
discretion, may readvertise such royalty for sale, or sell at private sale at not less 
than the market price for such period, or accept the value thereof from the lessee: 
Provided, however, That pending the making of a permanent contract for the sale 
of any royalty, oil or gas as herein provided, the Secretary of the Interior may sell 
the current product at private sale, at not less than the market price: And pro- 
vided further, That any royalty oil or gas may be sold at not less than the market 
price at private sale to any department or agency of the United States. 

Sec. 37. That the deposits of coal, phosphate, sodium, oil, oil shale, and gas, 
herein referred to, in lands valuable for such minerals, including lands and deposits 
described in the joint resolution entitled "Joint resolution authorizing the Secre- 
tary of the Interior to permit the continuation of coal mining operations on certain 
lands in Wyoming," approved August 1, 1912 (Thirty-seventh Statutes at Large, 
page 1346), shall be subject to disposition only in the form and manner provided in 
this act, except as to valid claims existent at date of passage of this act and there- 
after maintained in comphance with the laws under which initiated, which claims 
may be perfected under such laws, including discovery. 

Sec. 38. That, until otherwise provided, the Secretary of the Interior shall 
be authorized to prescribe fees and commissions to be paid registers and receivers 
of the United States land offices on account of business transacted under the pro- 
visions of this act. 

Approved, February 25, 1920. 



REGULATIONS FOR THE OPERATION OF THE ACT OF 

FEBRUARY 25, 1920. 

Under the authority of the act of Congress approved February 25, 1920, en- 
titled "An act to promote the mining of coal, phosphate, oil, oil shale, gas, and 
sodium on the public domain," the following rules and regulations are prescribed 
for the administration of the provisions of said act relative to oil and gas: 

I. — OIL AND GAS PERMIT 

Section 13 of the act authorizes the Secretary of the Interior to grant a quali- 
fied applicant the exclusive right to prospect for oil or gas for the period of two years, 
unless extended, and under authority thereof the following rules and regulations 
will govern the issuance of such permits: 

1. Qualifications of applicants. — Pursuant to section 1 of the act, per- 
mits may be issued to (a) a citizen of the United States; (6) an association of such 
citizens; (c) a corporation organized under the laws of the United States or of any 
State or Territory thereof; or (d) a municipality. 

2. Lands to which applicable. — The permit thus issued may include not 
more than 2560 acres of land wherein such deposits belong to the United States 
and are not within any known geological structure of a producing oil or gas field, 
the lands applied for to be taken in a reasonably compact form, by legal subdivisions 
if surveyed, and in an approximately square or rectangular tract if unsurveyed, 
the length of which must not exceed two and one-half times its width. Incontiguous 
tracts within a Hmited radius may be included in a permit when conditions are such 
that, because of prior disposals, a reasonable area of contiguous land can not be pro- 
cured. 

Such permits may not include land or deposits in (a) national parks; (6) forests 
created under the act of March 1, 1911 (36 Stat., 961), known as the Appalachian 
Forest Reserve act; (c) lands in military or naval reservations; or (d) Indian reser- 
vations. The application of the act to ceded Indian lands depends on the laws con- 
trolling their disposition. 

All permits or leases for the exploration for or development of oil or gas deposits 
under this act within the limits of national forests or other reservations or with- 
drawals to which this act is applicable shall be subject to and contain such condi- 
tions, stipulations, and reservations as the Secretary of the Interior shall deem neces- 
sary for the protection of such forests, reservations, or withdrawals, and the uses 
and purposes for which created. 

The boundaries of the geological structures of producing oil or gas fields will be 
determined by the United States Geological Survey, under the supervision of the 
Secretary of the Interior, and maps or diagrams showing same will be placed on file 
iiL local United States land oflSces. 

212 



■ 



APPENDIX 213 

It should be understood that under the act, the granting of a prospecting permit 
for oil and gas is discretionary with the Secretary of the Interior, and any apphca- 
tion may be granted or denied, either in part or in its entirety, as the facts may be 
deemed to warrant. 

3. Permits or leases for other materials. — The granting of a permit or 
lease for the development or production of oil or gas will not preclude other permits 
or leases of the same land for the mining of other minerals, under this act, with 
suitable stipulations for such joint operation, to the end that the full development 
of the mineral resources may be secured, nor will it necessarily preclude the allow- 
ance of apphcable entries, locations, or selections of the lands included therein with 
a reservation of the mineral deposits to the United States. 

4. Form and contents of application. — Apphcations for permits should 
be filed in the proper district land office, addressed to the Commissioner of the 
General Land Office, be suspended for 30 days to enable preference-right claims to 
be presented before action, and after due notation then forwarded for his con- 
sideration, with a full report as to status and confficts. No specific form of apph- 
cation is required, and no blanks will be furnished, but it should cover, in substance, 
the following points, and be under oath : 

(a) Apphcant's name and address. 

(6) Proof of citizenship of applicant, by affidavit of such fact, if native born; 
or if naturalized, by a certified copy of the certificate of naturahzation on the form 
provided for use in pubhc-land matters, unless such a copy is already on file; if 
a corporation, by certified copy of the articles of incorporation, and a showing as 
to the residence and citizenship of its stockholders; if a municipahty a showing of 
(1) the law or charter and procedure taken by which it has become a legal body 
corporate; (2) that the taking of a permit or lease is authorized under such law 
or charter; and (3) that the action proposed has been duly authorized by the gov- 
erning body of such municipality. 

(c) A statement that the apphcant is not the holder of more than two other 
subsisting permits in the same State, nor of any permit in the same geologic struc- 
ture, together with a statement of any other applications for permits in the same 
State, in which the apphcant is directly or indirectly interested, fully disclosing the 
nature and extent of such interests. In this connection attention is directed to the 
Hmitations and exceptions of section 27 of the act. 

(d) Description of the land for which the permit is desired, by legal subdivisions 
if surveyed, and by metes and bounds if unsurveyed, in which latter case, if deemed 
necessary, a survey sufficient more fully to identify the land may be required before 
the permit is granted. In order to properly identify unsurveyed lands, great care 
should be taken, and if practicable the metes and bounds description should be 
connected by course and distance with some corner of the pubhc land surveys. 

(e) A statement that to the best of applicant's knowledge and behef the land 
apphed for is not within any known geological structure of a producing oil or gas 
field. 

(/) Three references as to apphcant's reputation and business standing. 

(g) If the applicant is claiming a preference right as explained in the next suc- 
ceedmg section of these regulations, he should set up fully the facts upon which 
such preference right is based, together with a true copy of the posted notice. 



214 APPENDIX 

(h) The applicant must furnish a bond, with quaUfied corporate surety, in the 
sum of $1000, conditioned against the failure of the permittee to repair promptly, 
so far as possible, any damage to the oil strata or deposits resulting from improper 
methods of operation. The penalty of the bond may be increased by the Secretary 
of the Interior when conditions warrant, particularly in relief cases. This bond 
may be filed with the apphcation, which will expedite action thereon, or within 
10 days after receipt of notice by the apphcant that the permit will be granted when 
the bond is filed. 

Additional bonds, or a bond with additional obligations therein, will be re- 
quired in special cases where a permit embraces reserved deposits in lands thereto- 
fore entered or patented with a reservation of the oil and gas to the United States, 
together with a right to prospect for, mine, and remove the same pursuant to the act 
of July 17, 1914 (38 Stat., 509), or where the lands constitute a portion of a rec- 
lamation project. 

A revenue stamp must be attached to the bond at the rate of 1 cent on each $1 
or fractional part thereof of premium paid. 

The following form of bond is prescribed for use in ordinary cases in connection 
with appUcations for permit: 

Department of the Interior, 
general land office. 



U. S. Land Office- 
Serial Number- 



Bond of oil and gas permittee. 

[Act of Feb. 25, 1920 (Pubhc No. 146).] 

Know all men by these presents. That we, , of the county of 

, in the State of , as principal, and of the county of 

in the State of , as surety, are held and firmly bound unto the United 



States of America in the sum of dollars, lawful money of the United States 

to be paid to the United States, for which payment, well and truly to be made, we 
bind ourselves, and each of us, and each of our heirs, executors, administrators or 
successors, and assigns, jointly and severally by these presents. 

Signed with our hands and sealed with our seals this day of in 

the year of our Lord one thousand nine hundred and . 

The condition of the foregoing obhgation is such that, whereas the said prin- 
cipal has made application under the act of February 25, 1920 (Pubhc No. 146), 
for a permit to prospect for oil and gas for two years upon the following described 

lands ; and whereas said permit, if granted, will be on condition that 

all operations shaU be conducted in accordance with approved methods; that all 
proper precautions shall be exercised to prevent waste of oil or gas developed in 
the lands, or the entrance of water through wells drilled by, or on behalf of, 
the principal to the oil sands or oil-bearing strata to the destruction of the oil 
deposits. 

Now therefore, if said principal shall promptly repair any damage that may 
result to the oil strata or deposits resulting from improper methods of operation, 
or from failure to comply fully with the aforesaid conditions of said permit, then the 



APPENDIX 215 

above obligation is to be void and of no effect; otherwise to remain in full force 
and virtue. 

Signed, sealed, and delivered in presence of — 
Name and address of witness : 



Principal. 
Surety. 



[L. S.] 
[L. S.] 



In lieu of corporate surety, the applicant may deposit United States bonds of 
the par value of not less than $1000, pursuant to section 1320 of the act of Febru- 
ary 24, 1919 (see Treasury Circular No. 154, of June 30, 1919). When United 
States bonds are submitted as security in lieu of corporate surety same should be 
accompanied with a bond and power of sale duly executed by the applicant in sub- 
stantially the following form: 



Department of the Interior, 
general land office. 



U. S. Land Office 
Serial No. 



Bond of oil and gas permittee where United States bonds are accepted in lieu of surety 
or sureties, and power of attorney. 

[Act of Feb. 25, 1920 (Pubhc No. 146).] 

Know all men by these presents, That of , State of , as 

obligor, is held and firmly bound unto the United States of America in the sum of 
SI 000, lawful money of the United States, to be paid to the United States, for which 
pajTnent, well and truly to be made, binds himself, his heirs, executors, adminis- 
trators, and assigns by these presents. 

The condition of the foregoing obligation is such that whereas the said obligor 
has made application under the act of February 25, 1920 (Public No. 146), for 
a permit to prospect for oil and gas for two years upon the following-described 
land: ; and 

Whereas said permit, if granted, will be on condition that all operations shall 
be conducted in accordance with approved methods; that all proper precautions 
shaU be exercised to prevent waste of oil or gas developed in the lands, or the en- 
trance of water through wells drilled by or on behalf of the obhgor to the oil sands 
or oil-bearing strata to the destruction of the oil deposits. 

Now, therefore, if said obligor shall promptly repair any damage that may 
result to the oil strata or deposits resulting from improper methods of operation, 
or through failure to comply fully with the aforesaid conditions of said permit, 
then the above obligation is to be void and of no effect: otherwise to remain in full 
force and virtue. 

The above-bounden obligor, in order the more fully to secure the United States 
in the payment of the aforesaid mentioned sum, hereby pledges as security therefor 
bonds of the United States in the principal sum of $1000, which said bonds are 



216 APPENDIX 

numbered serially and are in the denominations and amounts and are otherwise 
more particularly described as follows: 

bonds of $ bearing per cent interest with coupons 

attached to each, numbered , which said bonds have this day been deposited 

with the Secretary of the Interior and his receipt taken therefor. 

That the said obligor does hereby constitute and appoint the Secretary of the 
Interior as his attorney, for him and in his name to collect or to sell, assign and 
transfer the said United States bonds above described and deposited by the obligor 
as aforesaid, pursuant to authority conferred by section 1320, of the revenue act of 
1918, approved February 24, 1919, as security for the faithful performance of any 
and all of the conditions or stipulations as hereinbefore set out, and it is agreed that, 
in case of any default in the performance of the conditions and stipulations of such 
undertaking the said attorney shall have full power to collect said bonds or any part 
thereof, or to sell, assign, and transfer said bonds or any part thereof without notice, 
at public or private sale, free from any equity of redemption or without appraise- 
ment or valuation, notice and right to redeem being waived, and to apply proceeds 
of such sale or collection in whole or in part to the satisfaction of any damages, or 
deficiencies arising by reason of such default, as said attorney may deem best. 
The interest accruing upon said United States bonds deposited as above stated, in 
the absence of any default in the performance of any of the conditions or stipulations 
of the bond, shall be paid to said obligor. The said obligor hereby for himseK, his 
heirs, executors, administrators, and assigns ratifies and confirms whatever his 
said attorney shall do by virtue of these presents. 

In witness whereof I have hereunto set my hand and seal this day of 

19—. 

— . [L.S.] 

Signature. 

Before me, the undersigned, a notary public within and for the county of , 

in the State of , personally appeared and duly acknowledged 

the execution of the foregoing bond and power of attorney. 

Witness my hand and notarial seal this day of , 19 — . 



[Notarial Seal.] 

5. Preference right, how secured. — A preference right over others to a 
permit may be obtained, under section 13 of the act, by — 

(a) Erecting upon the land desired, subsequent to the approval of the act, 
a monument not less than 4 feet high, at some conspicuous place thereon, of such 
a size as to be visible to anyone who may be interested. The monument may be 
of iron, stone, or durable wood, not less than 4 inches square or in diameter, and 
must be firmly embedded in the ground. 

(5) Posting on or near said monument a notice stating that an application for 
permit will be made within 30 days after date of posting said notice, the notice to 
give the date and hour of posting, to be signed by the applicant, and give such a 
general description of the land to be covered by the permit, by reference to courses 
and distances from such monument and other natural objects and permanent monu- 
ments, as will reasonably identify the land. The area, approximately, must also 
be stated, and the notice must be so protected as to prevent its destruction by the 



APPENDIX 217 

elements. The preference right will exist for 30 days after the date of posting such 
notice, and if no application is filed within that time, the land will be subjected to 
any other application for permit or to other disposal. 

(c) In cases of conflict between a preference right application and one filed with- 
out any claim of preference, the priority of the initiation of the claim will govern; for 
example, the filing of a proper application in the land office prior to the posting of 
notice by another, as aforesaid, will give a prior right. 

6. Form and requirements of permit. — A permit will confer upon the 
recipient the exclusive right to prospect for oil or gas upon the lands embraced 
therein, provided he complies with the terms thereof, which permit will be, in form 
and substance, substantially as follows: 

The United States of America. 

department of the interior. 

General Land Office. 

U. S. Land Office 

Serial Number 



Know all men by these presents, That the Secretary of the Interior, under and 
by virtue of the act of Congress entitled "An act to promote the mining of coal, 
phosphate, oil, oil shale, gas, and sodium on the public domain," approved February 

25, 1920, has granted and does hereby grant a permit to granting 

the exclusive right for years from date hereof to prospect for oil or 

gas, but for no other purpose, the following described lands : , upon the 

express conditions following: 

1. To mark each of the corners of the claim within 90 days from date hereof 
with substantial monuments so that the boundaries can be readily traced on the 
ground, and post in a conspicuous place, upon the lands covered hereby, a notice 
that such a permit has been granted, and a description of the lands covered by this 
permit. 

2. Within six months (two years in Alaska) from date hereof to install upon 
some portion of the lands a substantial and adequate drilling outfit and to com- 
mence actual drilling operations. 

3. Within one year (three years in Alaska) from date hereof to drill one or 
more wells, not less than 6 inches in diameter to a depth of at least 500 feet each, 
unless valuable deposits of oil or gas shall be sooner discovered. 

4. Within two years (four years in Alaska) from date hereof to drill one or 
more wells to a depth of at least 2000 feet, unless valuable deposits of oil or gas 
shall be sooner discovered. 

5. Not to drill any well within 200 feet of any of the outer boundaries of the 
lands covered by this permit unless the adjoining lands have been patented or the 
title thereto otherwise vested in private owners. 

6. To carry on all operations hereunder in accordance with approved methods 
and practice; to use all reasonable precautions to prevent waste of oil or gas de- 
veloped in the land, or the entrance of water through wells drilled by permittees 
to the oil sands or oil-bearing strata to the destruction or injury of the oil deposits, 
and to carry out, at the expense of the permittee, all reasonable orders of the Secre- 
tary of the Interior relative to prevention of wast© and preservation of property, 



218 APPENDIX 

and to comply with such regulations as may be issued by the Secretary of the In- 
terior as to methods of operation. 

7. To furnish and maintain during the period of this permit a bond with quali- 
fied corporate surety in the sum of $ , conditioned against the failure of the 

permittee to repair promptly, so far as possible, any damage to the oil strata or 
deposits resulting from improper methods of operation. 

8. That as to any lands covered by this permit embraced at the date hereof 
in any entry or patent with a reservation of the oil and gas deposits to the United 
States pursuant to the act of July 17, 1914 (38 Stat., 509), or the act of December 
29 1916 (39 Stat., 862), permittee shall reimburse such entrymen or patentee for 
all damage to crops and improvements caused by drilhng or other prospecting opera- 
tions. 

9. That this permit is granted upon the express condition that the right is re- 
served to the Secretary of the Interior to permit upon such terms as he may de- 
termine to be just, for joint or several use, such easements or rights of way, including 
easements in tunnels upon, through, or in the lands covered thereby, as may be 
necessary or appropriate to the working of the same, or of other lands containing 
the deposits described in the act under which this permit is granted. 

10. This permit is granted on the express condition that if any of the land 
covered thereby is embraced in a forest, reclamation, power, or other withdrawal, 
or is segregated for any particular purpose operations under this permit shall be so 
conducted as not to interfere with the administration and use of the land for the 
purpose for which withdrawn or segregated to a greater extent than may be deter- 
mined by the Secretary of the Interior to be necessary for the most beneficial use of 
the land. 

11. The granting of this permit shall not preclude the allowance of entry, lo- 
cation, or selection of any of the lands included therein, where such entry, selection, 
or location is made with a reservation of the mineral deposits to the United States. 

12. That until this permittee shall apply for a lease of one-quarter or more of 
the area included herein, he shall pay to the United States 20 per cent of the gross 
value of all oil or gas secured by him from the lands and sold or otherwise disposed 
of, or held by him for sale or other disposition. 

13. The Secretary of the Interior reserves the right and authority to cancel this 
instrument for failure of the permittee to comply with any of the conditions enumer- 
ated herein or to exercise due dihgence in the work of development. 

14. Vahd rights existing at the date of this permit will not be affected thereby. 
Dated this day of , 19 — . 



Secretary of the Interior. 

7. Extension of life of permit. — If for any good reason the permittee is 
unable, with the exercise of diligence, to test the land within two years, application 
for extension for not to exceed two years may be filed within the life of the permit, 
and must be accompanied by a showing under oath, corroborated, as to the causes 
that make such extension necessary, and as to what efforts have been made to com- 
ply with the condition of the permit; ordinarily no extension will be granted in the 
absence of the minimum amount of drilling required by the permit. This appli- 
cation should be addressed to the Secretary of the Interior, and be filed either in the 



APPENDIX 219 

district land ofRce or in the General Land Office. This privilege is not applicable 
to Alaska. 

8. Reward for discovery. — Upon establishing to the satisfaction of the 
Secretary of the Interior that valuable deposits of oil or gas have been discovered 
within the limits of the land embraced in the permit, within the period of the permit 
or extension thereof, the permittee is entitled (a) to a lease of one-fourth of the land 
included in the permit, on a royalty of 5 per cent, or for at least 160 acres if there be 
that area in the permit; (6) to a preference right to a lease for the remainder of the 
land covered by his permit at such royalty as may be fixed by the Secretary of the 
Interior, not less than 12| per cent in amount or value of the production, nor more 
than the royalties fixed for leases under section 18 of the act (sec. 19, par. c, of these 
regulations), except that on that portion of the average production exceeding 200 
barrels per day per well for the calendar month, the royalties shall be 33 i per cent 
for oil of 30 degrees Baume or over and 25 per cent for oil of less than 30 degrees 
Baume. 

9. Penalty for default. — The permit will be subject to cancellation by the 
Secretary of the Interior for failure of the permittee to comply with any of the con- 
ditions enumerated therein or to exercise due diligence in the work of development. 

In the absence of discovery of oil or gas within the period of the permit or ex- 
tension thereof, the permit will thereupon terminate and the lands or deposits will 
automatically revert to their original status, but the land will continue segregated 
pending action by the Land Department on any application for extension that is 
timely filed. 

10. Permits in Alaska. — The foregoing rules and regulations generally 
wiU apply to permits in Alaska, imder section 13 of the act, but with some modifi- 
cations, viz: 

(a) A person, association, or corporation is authorized to hold five permits at 
one time in said territory, but only one permit in the geologic structure of any one 
producing oil field; hence subdivision c of section 4 of these regulations should be 
modified accordingly in making application for permits for lands in Alaska under 
section 13 of the act. 

(6) The preference right treated under section 5 of these regulations extends 
for a period of six months after the erection of monument and posting of notice 
provided for therein, and the period for marking of the corners is extended to one 
year after the granting of the permit. 

(c) The time for exploratory work in Alaska is four years, instead of two, and 
there is no provision for extension of such period. The various items necessary in 
this exploratory work are set forth in the form of permit herein provided, the Alaskan 
period being included in parentheses, after the period prescribed in the States. 

11. Permits for reserved deposits. — The deposits of oil and gas in all 
lands for which a patent has issued with a reservation of the oil and gas to the United 
States, under the act of July 17, 1914 (38 Stat., 509), subject to the preference right, 
if any, explained in the next succeeding section hereof, may be included in a permit 
imder the provisions of this act, conditioned upon the permittee filing with the 
Secretary of the Interior a satisfactory bond or undertaking as security for the 
payment of all damages to crops and improvements on such lands by reason of 
prospecting, as required by the said act. (See G. L. 0. Circular No. 393, 44 L. D., 
32.) 



220 APPENDIX 

12. Preference right of owner of surface. — Under section 20 of the 
act a preference right to a prospecting permit is given to an entryman or owner 
of land not claimed under any railroad grant, under the following conditions: (1) 
The entry must have been made prior to February 25, 1920; (2) the entry must have 
been bona fide under and pursuant to the act under which made; (3) the entry must 
have been made without a reservation of the oil and gas, for land unwithdrawn, not 
classified as oil and gas land, and not known to be valuable for its oil or gas deposits, 
at date of entry; (4) in case the entry is patented, it must have been with a reserva- 
tion of the oil and gas to the Government; if the entry is not patented, the entry- 
man must waive all right under the entry to the oil and gas in the land; (5) if the 
entry has been assigned or transferred, such assignment or transfer must have been 
prior to January 1, 1918. 

(a) Should an application for permit for entered or patented lands with a res- 
ervation of the oil and gas content to the United States be filed by a person other 
than the entryman or owner of the land, the applicant will be required to serve 
personal notice of such application upon the owner or owners of the land so entered 
or patented, with a warning therein that if said owner desires to exercise his prefer- 
ence right, if any, to a permit, he must file within 30 days his application therefor 
in the proper local land office. The apphcant must furnish evidence of the ser- 
vice of notice on the owner and evidence that the party served is the owner of the 
land involved, either by his aflfidavit, duly corroborated, or by certificate of the 
ofl&cer in whose office transfers of real property are to be recorded. 

(6) The preference-right applicant must show that he is entitled under the sec- 
tion above outlined, together with his qualifications, to hold a permit as previously 
set forth in these regulations, and if such an application be filed, the Secretary of 
the Interior will award the permit to the party entitled thereto. 

(c) If the land, either withdrawn or unwithdrawn, is covered by an unpatented 
nonmineral entry without a reservation of the oil and gas content to the Government, 
a prospecting permit may not be granted so long as the entry subsists without such 
reservation. In cases where applications for prospecting permits are filed by per- 
sons other than the entrymen for land in this status such applications will be re- 
ferred to the United States Geological Survey for classification as to the prospective 
oil value of the land affected. If the Geological Survey shall conclude and report 
that the land embraced in such a nonmineral entry is without prospective oil or 
gas value, the application for permit will be rejected as to such land; but if the 
Geological Survey shall report that the land has a prospective oil or gas value and 
offers a favorable opportunity for prospecting operations, then the General Land 
Office will direct the proper local officers to serve notice on the nonmineral entry- 
man to the effect that said land has been reported as valuable for its oil or gas con- 
tent, and that the said entryman will be allowed fifteen (15) days within which 
(1) to file in the local office his consent to a reservation to the Government of the 
oil and gas content of the land embraced in his entry and in which to exercise his 
preference right, if any, to a prospecting permit for said land by filing a proper ap- 
plication therefor, or (2) to show cause, if any there be, why he should not consent 
to the mineral reservation, failing in either of which his entry will be canceled with- 
out further notice. The local office will thereupon report the action taken to the 
commissioner, whereupon (1) if the nonmineral entryman shaU have failed to take 



APPENDIX 221 

any action, order of cancellation of the nonmineral entry will be made and action 
taken on the prospecting permit accordingly; (2) if consent to the reservation shall 
have been filed, a prospecting permit will be granted to the entryman or the former 
apphcant, as the case may be, for the reserved mineral deposits; (3) if the nonmineral 
entryman shall submit a showing why the entry should not be impressed with a 
reservation of the mineral to the Government, such showing will be referred to the 
Geological Survey for consideration and report. If upon the receipt of such report 
the department shall conclude that the land is without mineral value, the applica- 
tion for prospecting permit will be rejected; but if the department shall conclude 
that, notwithstanding the showing made by the entryman, the land has a pro- 
spective oil and gas value, such action wiU be taken as the facts may warrant. 

From the above it will be seen that it is desirable on the part of any applicant 
for a prospecting permit for land already embraced in a nonmineral entry without 
a reservation of the mineral, and Ukewise desirable on the part of any nonmineral 
entryman who is contending that the land is nonmineral in character, to submit 
with their respective applications or showings as complete and accurate geological 
data as may be procurable, preferably the reports and opinions of qualified experts. 

(d) In case of conflict between a preference-right claim under section 20 of the 
act and one claimed by virtue of section 18 or 19, the issue will be determined on 
the basis of priority. 

(e) Claimants under this section of the act may combine their holdings for the 
purpose of making joint application for a permit, provided the aggregate area does 
not exceed 2560 acres and that all the lands for which application is made are within 
an area of 6 miles square or within the same township. 

(J) The right of a permittee under a preference-right permit to a lease after 
discovery is governed by other provisions of the act, as set forth in section 8 of these 
regulations. 

12^. Assignment of permits. — Permits, after being awarded, may be as- 
signed to quahfied persons or corporations upon first obtaining consent of the Secre- 
tary of the Interior. Mere rights to receive a permit are not assignable. 

n. — OIL AND GAS LEASES 

13. Designation and offer of lands for lease. — Pursuant to the provisions 
of section 17 of the act, the unappropriated deposits of oil or gas situated within 
known geologic structures of producing oil or gas fields, and the lands containing 
same, will be divided into leasing blocks or tracts in areas not exceeding 640 acres 
each, and not exceeding in length two and one-half times their width, and offered 
for lease at a stated royalty by competitive bidding to the highest responsible bidder 
having the quahfications prescribed by section 15, paragraph (a) hereof. 

14. Notice of lease offer. — Notice of the offer of lands for lease will be 
given by pubHcation in a newspaper of general circulation in the county in which 
the lands or deposits are situated for a period of 30 days; such notice will state 
the day and hour on which the offering will be made at public auction at the United 
States land office of the district in which the lands are situated, to the quahfied 
bidder offering the highest bonus for the lease at the stated rental and royalty. 
Copy of the notice will be posted in said local office during the period of pubUcation. 



222 APPENDIX 

This notice will be published at the expense of the Government. All bidders at 
any such auction are warned against violation of the provisions of section 59 of the 
United States Criminal Code, approved March 4, 1909, prohibiting unlawful com- 
bination or intimidation of bidders. 

15. Auction of lease. — At the time fixed in the notice, the register or re- 
ceiver will, by pubhc auction, offer the land for lease on the terms and conditions 
as to payments of royalties and rents fixed in the notice, to the qualified bidder of 
the highest amount offered as a bonus for the privilege of leasing the land. The 
successful bidder must deposit with the receiver on the date of the sale, certified 
check on a solvent bank, or cash, for one-fifth of the amount bid by him, which pay- 
ment the receiver will credit to "Trust funds — Unearned moneys." At the time 
of such payment the successful bidder will also file the requisite showing of his 
qualifications to receive a lease, which shall include the following: 

(a) Proof of citizenship of apphcant; by affidavit of such fact, if native born, 
or if naturalized, by certified copy of the certificate of naturahzation, on the form 
provided for use in public land matters, unless such copy is already on file; if a 
corporation, by certified copy of the articles of incorporation and a showing as to 
the residence and citizenship of its stockholders. 

(6) The affidavit of the bidder or the affidavit of one of the officers of a corporate 
bidder that the bidder does not hold another lease in the geologic structure of the 
same producing oil or gas field, nor more than two leases, or a lease and a permit, 
in the State, except under sections 18, 18a, 19, and 22 of the act; and also that the 
acceptance of the lease by such successful bidder will not be in violation of the 
provisions of section 27 of the act relative to excess holdings by individuals or cor- 
porations. 

The register and receiver will thereupon transmit such showing, together with 
a report of the proceedings had at the auction, by special letter to the Commissioner 
of the General Land Office. 

16. Award of lease. — On receipt of the report of the auction from the 
register and receiver, the Secretary of the Interior will take action thereon, and 
either award the lease to the successful bidder or reject same, notice of which wiU 
be forthwith transmitted to the bidder through the local office. If the lease shall 
be awarded, the notice will be accompanied by copies of leases for execution by the 
lessee, who shall, within 30 days from receipt of such notice, execute said lease in 
triplicate, and pay to the receiver the balance of the bonus bid by him, together 
with the first year's rental, and also cause to be filed in the Land Office the bond 
required by section 2 (a) of the lease; in lieu of such bond, Liberty bonds will be 
taken at par in the amount of the bond, as provided in the act of February 24, 1919 
(40 Stat., 1148). If the bid be rejected, the receiver will return by his official check 
the deposit made at the auction. In case of the award of a lease and failure on the 
part of the bidder to execute same, and otherwise comply with the apphcable regula- 
tions, the deposit made will be considered forfeited and disposed of as other receipts 
under this act. 

17. Form of lease. — The lease referred to in the preceding sections will be 
in form and substance substantially as follows: 



1 



APPENDIX 223 

U. S. Land Office 

Serial No. 

• Department of the Interior. 

Lease of oil and gas lands under the act of February 25, 1920. 
Date — Parties. — This indenture of lease entered into, in triplicate, this 



day of A. D., 19 — , by and between the United States of America, acting in 

this behalf by the Secretary of the Interior, party of the first part, hereinafter called 

the lessor, and of , party of the second part, hereinafter called the 

lessee, under, pursuant, and subject to the terms and provisions of the act of Con- 
gress approved February 25, 1920, Public No. 146, entitled "An act to promote the 
mining of coal, phosphate, oil, oil shale, gas, and sodium on the public domain," 
hereinafter referred to as the act, which is made a part hereof, witnesseth: 

Section 1. Purposes. — That the lessor in consideration of rents and royalties 
to be paid, and the covenants to be observed as herein set forth, does hereby grant 
and lease to the lessee the exclusive right and privilege to drill for, mine, extract, 
remove, and dispose of all the oil and gas deposits in or under the following described 
tracts of land situated in the county of , State of , and more par- 
ticularly described as follows: containing acres, more or less, 

together with the right to construct and maintain thereupon all works, buildings, 
plants, waterways, roads, telegraph or telephone lines, pipe lines, reservoirs, tanks, 
pumping stations, or other structures necessary to the full enjoyment hereof, for 
a period of 20 years, with the preferential right in the lessee to ren£w this lease for 
successive periods of 10 years, upon such reasonable terms and conditions as may 
be prescribed by the lessor, unless otherwise provided by law at the time of the 
expiration of such periods. 

Sec. 2. In consideration of the foregoing, the lessee hereby agrees: 

(a) Bond. — To furnish a bond with approved corporate surety in the penal 
sum of S5000, conditioned upon compliance with the terms of the lease. 

(b) Commence drilling. — The lessee agrees, within three months from delivery 
of executed lease, to proceed with reasonable dihgence to install on the leased ground 
a standard or other efficient drilling outfit and equipment, and to commence drill- 
ing at least one well, and to continue such drilhng with reasonable diligence to pro- 
duction, or to a point where the well is demonstrated unsuccessful, and thereafter 
to continue drilling with reasonable diligence at least one well at a time until the 
lessee shall have drilled wells equal in number to the number of 40-acre tracts em- 
braced in the leased premises, unless the lessor shall, for any reason deemed suffi- 
cient, consent in writing to the drilling of a less number of wells; the lessee further 
agrees to drill all necessary wells fairly to offset the wells of others on adjoining land 
or deposits not the property of the United States. 

(c) Royalty and rents. — To pay the lessor in advance, beginning with the date 
of the execution of this lease, a rental of $1 per acre per annum during the continu- 
ance hereof, the rental so paid for any one year to be credited on the royalty for 

that year, and, in addition to such rental, a royalty of per cent of the value 

of oil or gas produced from the land leased herein (except oil or gas used for produc- 
tion purposes on said lands or unavoidably lost), or, on demand of the lessor, 

per cent of the oil or gas produced Cexcept oil or gas used for production purposes 
on said lands, or unavoidably lost), in which case credit for rent shall be on the basis 



224 APPENDIX 

of the current field price of oil, the royalty, when paid in value, to be due and pay- 
able monthly on the 15th of each month following the month in which produced, 
to the receiver of public moneys of the proper land district; and when paid in kind, 
to be delivered in the field where produced at such times, and in such manner as 
may be required by the lessor; such royalties, whether in value or kin4, shall be 
subject to reduction whenever the average daily production of any oil well shall 
not exceed 10 barrels per day, if in the judgment of the lessor the wells can not be 
successfully operated upon the royalties fixed herein. 

{d) Sales contract. — To file with the Secretary of the Interior copies of all 
sales contracts for the disposition of oil and gas produced hereunder, except for 
production purposes on the land leased, and, in the event the United States shall 
elect to take its royalties in money instead of in oil or gas, not to sell or otherwise 
dispose of the products of the land leased, except in accordance with a sales contract 
or other method first approved by the Secretary of the Interior. 

(e) Monthly statement. — To furnish monthly statements in detail in such 
form as may be prescribed by the lessor, showing the amount, quality, and value 
of all oil and gas produced and saved during the preceding calendar month as the 
basis for computing the royalty due the lessor. The leased premises, and all wells, 
improvements, machinery, and fixtures thereon or connected therewith, and all 
books and accounts of the lessee shall be open at all times for the inspection of any 
duly authorized officer of the department. 

(/) Plats and reports. — To furnish annually and at such times as the Sec- 
retary shall require, in the manner and form prescribed by the Secretary of the 
Interior, a plat showing all development work and improvements on the leased 
lands, and other related information, with a report as to all buildings, structures, 
or other works placed in or upon said leased lands, accompanied by a report in de- 
tail as to the stockholders, investment, depreciation, and cost of operation, together 
with a statement as to the amount and grade of oil and gas produced and sold, and 
the amount received therefor, by operations hereunder. 

(g) Log of wells. — To keep a log in the form prescribed by the Secretary of all 
the wells drilled by the lessee, showing the strata and character of the ground passed 
through by the drill, which log, or copy thereof, shall be furnished to said lessor on 
demand. 

(h) Diligence — Prevention of waste — Health and safety of workmen. — To 
exercise reasonable diligence in drilling and operating wells for the oil and gas on 
the lands covered hereby while such products can be secured in paying quantities, 
unless consent to suspend operations temporarily is granted by the Secretary of 
the Interior; to carry on all operations hereunder in a good and workmanlike man- 
ner, in accordance with approved methods and practice, having due regard for the 
prevention of waste of oil or gas developed on the land, or the entrance of water 
through wells drilled by the lessee to the oil sands or oil-bearing strata, to the de- 
struction or injury of the oil deposits, the preservation and conservation of the 
property for future productive operations, and to the health and safety of workmen 
and employees; to plug securely any well before abandoning the same so as to 
effectually shut off all water from the oil or gas bearing strata; not to drill any well 
within 200 feet of any of the outer boundaries of the lands covered hereby unless 
tfie adjoining lands have been patented or the title thereto otherwise vested in 
private owners; to conduct all mining, drilling, and related productive operations 



APPENDIX 225 

subject to the inspection of the lessor; to carry out at expense of the lessee all reason- 
able orders and requirements of lessor relative to prevention of waste and preserva- 
tion of the property and the health and safety of workmen, and on failure so to do 
the lessor shall have the right to enter on the property to repair damage or prevent 
waste at lessee's cost; to abide by and conform to regulations in force at the time 
the lease is granted covering the matters referred to in this paragraph: Provided, 
That lessee shall not be held responsible for delays or casualties occasioned by causes 
beyond lessee's control. 

{%) Taxes and wages — Freedom of purchase. — To pay when due all taxes 
lawfully assessed and levied under the laws of the State upon improvements, oil, 
and gas produced from the lands hereunder, or other rights, property, or assets of 
the lessee; to accord all workmen and employees complete freedom of purchase, 
and to pay all wages due workmen and employees at least twice each month in the 
lawful money of the United States. 

(j) Reserved deposits. — To comply with all statutory requirements and regu- 
lations thereunder, if the lands embraced herein have been or shall hereafter be dis- 
posed of under laws reserving to the United States the deposits of oil and gas therein, 
subject to such conditions as are or may hereafter be provided by the laws reserving 
such oil or gas. 

(k) Excess holdings. — To observe faithfully the provisions of section 27 of 
the act defining the interest or interests that may be taken, held, or exercised under 
leases authorized by said act. 

(I) Assignment of lease. — Not to assign this lease or any interest therein, nor 
subtlet any portion of the leased premises, except with the consent in writing of 
the Secretary of the Interior first had and obtained. 

(m) Deliver premises in case of forfeiture. — To deliver up the premises leased, 
with all permanent improvements thereon, in good order and condition in case of 
forfeiture of this lease. 

Sec. 3. The lessor expressly reserves: 

(a) Rights reserved — Easements and rights of way. — The right to permit for 
joint or several use such easements or rights of way, including easements in tun- 
nels upon, through, or in the lands leased, occupied, or used as may be necessary or 
appropriate to the working of the same or of other lands containing the deposits 
described in said act, and the treatment and shipment of products thereof by or 
under authority of the Government, its lessees, or permittees, and for other public 
purposes. 

(b) Disposition of surface. — The right to lease, sell, or otherwise dispose of the 
surface of the lands embraced within this lease under existing law or laws herein- 
after enacted in so far as said surface is not necessary for the use of the lessee in the 
extraction and removal of the oil and gas therein. 

(c) Pipe lines to convey at reasonable rates. — The right to require the lessee, his 
assignee, or beneficiary, if owner, or operator of, or owner of a controlling interest 
in any pipe line, or any company operating the same which may be operated ac- 
cessible to the oil derived from lands under such lease, to accept and convey at 
reasonable rates and without discriminating the oil of the Government or of any 
citizen or company, not the owner of any pipe fine, operating a lease or purchasing 
oil or gas under the provisions of this act. 

(d) Monopoly and fair prices. — Full power and authority to carry out and 



226 APPENDIX 

enforce all the provisions of section 30 of the act, to insure the sale of the production 
of such leased lands to the United States and to the pubUc at reasonable prices to 
prevent monopoly and to safeguard the pubhc welfare. 

(e) Helium. — Pursuant to section 1 of the act, the lessor reserves the right 
to take all helium from any gas produced under this lease, but the lessee shall not 
be required to extract and save the helium for the lessor; in case the lessor elects 
to take the helium, the lessee shall dehver all gas containing same, or portion thereof 
desired to the lessor in the manner required by the lessor, for the extraction of the 
hehum in such plant or reduction works for that purpose as the lessor may provide, 
whereupon the residue shall be returned to the lessee with no substantial delay in 
the delivery of gas produced from the well to the purchaser thereof; provided, 
that the lessee shall not, as a result of the operation ui this section provided for, 
suffer a diminution in value of the gas from which the hehum has been extracted, 
or loss otherwise, for which the lessee is not reasonably compensated, save for the 
value of the helium extracted; the lessor further reserves the right to erect, main- 
tain, and operate any and all reduction works and other equipment necessary for 
the extraction of helium on the premises leased. 

Sec. 4. Surrender and termination of lease. — The lessee may, on consent of 
the Secretary of the Interior first had and obtained in writing, surrender and ter- 
minate this lease upon the payment of all rents, royalties, and other obhgations 
due and payable to the lessor, and upon payment of all wages and moneys due and 
payable to the workmen employed by the lessee, and upon a satisfactory showing 
to the Secretary that the pubhc interest will not be impaired; but in no case shall 
such termination be effective until the lessee shall have made full provision for 
conversation and protection of the property; upon like consent had and obtained 
the lessee may surrender any legal subdivisions of the area included herein. 

Sec. 5. Purchase of materials, etc., on termination of lease. — Upon the expi- 
ration of this lease, or the earlier termination thereof pursuant to the last preceding 
section, the lessor or another lessee may, if the lessor shall so elect within six months 
from the termination of the lease, purchase all materials, tools, machinery, appliances, 
structures, and equipment placed in or upon the land by the lessee, and in use thereon 
as a necessary or useful part of an operating or producing plant, on the payment 
to the lessee of such sum as may be fixed as a reasonable price therefor by a board 
of three appraisers, one of whom shall be chosen by the lessor, one by the lessee, and 
the other by the two so chosen; pending such election all equipment shall remain 
in normal position. If the lessor, or another lessee, shall not, within six months, 
elect to purchase all or any part of such materials, tools, machinery, appliances, 
structures, and equipment, the lessee shall have the right at any time, within 90 
days, to remove from the premises all the materials, tools, machinery, appliances, 
structures, and equipment which the lessor shall not have elected to purchase, save 
and except casing in wells and other equipment or apparatus necessary for the pres- 
ervation of the well or wells. 

Sec. 6. Judicial proceedings in case of default. — If the lessee shall fail to com- 
ply with the provisions of the act or make default in the performance or observance 
of any of the terms, covenants, and stipulations hereof, or of the general regulations 
promulgated and in force at the date hereof, and such default shall continue after 
service of written notice thereof by the lessor, then the lessor may institute appro- 
priate judicial proceedings for the forfeiture and cancellation of this lease in accord- 



APPENDIX 227 

ance with the provisions of section 31 of said act; but this provision shall not be 
construed to prevent the exercise by the lessor of any legal or equitable remedy 
which the lessor might otherwise have. A waiver of any particular cause of for- 
feiture shall not prevent the cancellation and forfeiture of this lease for any other 
cause of forfeiture, or for the same cause occurring at any other time. 

Sec. 7, Heirs and successors in interest. — It is further covenanted and agreed 
that each obhgation hereunder shall extend to and be binding upon and every 
benefit hereof shall inure to the heirs, executors, administrators, successors, or 
assigns of the respective parties hereto. 

Sec. 8. Unlawful interest. — It is also further agreed that no Member of or 
Delegate to Congress or Resident Commissioner, after his election or appointment, 
or either before or after he has qualified, and during his continuance in office, and 
that no officer, agent, or employee of the Department of the Interior shall be ad- 
mitted to any share or part in this lease or derive any benefit that may arise there- 
from, and the provisions of section 3741 of the Revised Statutes of the United 
States, and sections 114, 115, and 116 of the Codification of the Penal Laws of the 
United States approved March 4, 1909 (35 Stat., 1109), relating to contracts enter 
into and form a part of this lease so far as the same may be applicable. 
In witness whereof 

The United States of America, 

By [L. S.] 

Witness : 

[L. S.] 

[L. S.] 

[L. S.j 

Bond required under paragraph 2a of the lease should be in substantially the 
following form: 

Department of the Interior 
general land office 



U. S. Land Office 
Serial Number 



Bond of oil and gas 
[Act of Feb. 25, 1920 (Public No. 146).] 

Know all men by these presents. That we, , of the county of 

, in the State of , as principal, and of the county of , 



in the State of , as surety, are held and firmly bound unto the United States 

of America in the sum of doUars, lawful money of the United States, for the 

use and benefit of the United States and of any entryman or patentee of any portion 
of the land covered by the hereinafter described lease heretofore entered or pat- 
ented with a reservation of the oil and gas deposits to the United States, to be paid 
to the United States, for which payment, well and truly to be made, we bind our- 
selves, and each of us, and each of our heirs, executors, administrators, successors, 
and assigns, jointly and severally by these presents. 

Signed with our hands and sealed with our seals this day of , in 

the j^ear of our Lord one thousand nine hundred and . 

The condition of the foregoing obligation is such that — 



228 APPENDIX 

Whereas the said principal, by instrument dated , has been granted the 

exclusive right to drill for, mine, extract, remove, and dispose of all the oil and gas 
deposits in or imder the following described lands , under and pur- 
suant to the provisions of the act approved February 25, 1920 (Public No. 146); 
and 

Whereas the said principal has by such instrument entered into certain cove- 
nants and agreements set forth therein, under which operations are to be conducted: 

Now, therefore, if said principal shall faithfully comply with all the provisions 
of the above described lease, then the above obligation is to be void and of no effect, 
otherwise to remain in full force and virtue. 

Signed, sealed, and delivered in presence of — 
Name and address of witness: 



Principal. 



Surety. 



[L. S.] 
[L. S.] 



Where Government bonds are deposited as security in lieu of a surety bond, in 
compliance with paragraph 2 (a) of the lease form, same should be accompanied 
with a combined bond and power of attorney to sell, duly executed by the lessee, 
along the same general lines as the form set out in paragraph 4 (h) of these regula- 
tions with suitable changes made in the condition of the bond to correspond with 
the condition in the lease bond, form for which is above set out. 

III. — RELIEF MEASURES 

Sections 18, 19, and 22 of the act provide for the "relief," so called, of certain 
defined claimants of oil and gas lands, who at date of the act had not perfected their 
claims under the preexisting mining laws, and are prevented from doing so by with- 
drawal of the land or by this act. 

18. Conditions for relief under section 18: 

(a) That the land claimed must have been included in the Executive order of 
withdrawal of September 27, 1909, and must have remained so withdrawn. 

(b) That the claim must have been initiated under the placer mining laws prior 
to July 3, 1910, and claimed and possessed continuously from that time. 

(c) That no claimant who has acquired any interest in the land since September 
1, 1919, from another claimant who, on that date or since that time, was, or is claim- 
ing or holding, more than the maximum allowed a claimant under section 18 of the 
act, may secure a lease under section 18, or any interest therein. This limitation 
does not, however, apply to an exchange of an interest in such lands made prior to 
January 1, 1920, which did not increase or reduce the area or acreage held or claimed, 
in excess of the maximum by either party to the exchange. 

(d) That claimant or predecessors must have drilled an oil or gas well on the 
land to discovery. 

(e) That all conflicting claims asserted prior to July 1, 1919, must have been 
disposed of, as provided in section 28 hereof or otherwise. 

(/) That no claimant who has been guilty of any fraud or who had knowledge 



APPENDIX 229 

or reasonable grounds to know of any fraud, or who has not acted honestly and in 
good faith, shall be entitled to any of the benefits of this section. 

(g) That claimant must, on or before August 25, 1920, file a relinquishment to 
the United States of all right, title, and interest in and to the land, together with 
an appHcation for a lease. This relinquishment may be in the form of an uncon- 
ditional quitclaim deed, duly executed and acknowledged, but not recorded, and 
when filed will be held for such action as the facts and the law in the case warrant 
and require. 

(h) That claimant must pay for one-eighth of the value at the time of produc- 
tion of all oil and gas produced prior to date of fihng relinquishment and appH- 
cation for relief, exclusive of oil and gas used on the land for production purposes, 
or unavoidably lost. 

19. Relief that may be granted under section 18: 

(a) Lands not in naval petroleum reserves. — A qualified claimant, upon com- 
plying with the provisions of the act and these regulations, will be entitled to a 20- 
year lease from the United States, commencing and effective as of the date of filing 
relinquishment and appHcation for relief, substantially in the form prescribed in 
section 17 hereof, at a royalty to be fixed by the Secretary of the Interior, but not 
less than 12^ per cent of all oil and gas produced exclusive of that used for pro- 
duction purposes on the claim, or unavoidably lost. There is, however, a limi- 
tation placed by the act upon the acreage that may be included in such lease. If 
the geologic oil or gas structure of the producing field in which the claim is situated 
does not exceed 640 acres in area the lease may include the entire area if covered by 
the claim; but if the area of such structure exceeds 640 acres the act provides that 
not more than one-half of the area, same to be selected by the claimant but in no 
case to exceed 3200 acres, may be leased to any one claimant. 

(h) Lands in naval petroleum reserves. — If the land claimed is within a naval 
petroleum reserve the claimant will be entitled to lease only the producing wells 
on the claim, together with an area of land sufficient for the operation of such wells, 
upon a royalty to be fixed by the Secretary of the Interior, but not less than 12| 
per cent of the production, except that used for production purposes on the claim or 
unavoidably lost. The act forbids the drilling of any weUs in lands subject to 
this provision within 660 feet of the leased wells without the consent of the lessee. 
It further provides that the President may, in his discretion, lease the remainder or 
any part of the claim on which such wells have been drilled, and in the event of such 
leasing the claimant shall have a preference to such lease. The President may also 
permit the lessee of any weH to drill additional wells within the limited area of 660 
feet upon such terms and conditions as he may prescribe. These terms and con- 
ditions can not be prescribed here, but will be determined on the merits in each 
separate case. 

(c) Royalties. — The royalties payable under leases granted pursuant to section 
18 of the act are cumulative, and are hereby determined and prescribed as follows: 

For ah oil produced of 30° Baume or over upon each claim on which the weUs 
average not exceeding 20 barrels per day per well for the calendar month, 12^ per 
cent; upon each claim on which the wells average more than 20 barrels and not more 
than 50 barrels per day per well for the calendar month, 16f per cent; upon each 
claim on which the wells average more than 50 barrels and not more than 100 bar- 
rels per day per weU for the calendar month, 20 per cent; upon each claim on which 



230 APPENDIX 

the wells average more than 100 barrels per day per well for the calendar month, 
25 per cent. 

For all oil produced of less than 30° Baume upon each claim on which the wells 
average not exceeding 20 barrels per day per well for the calendar month, 12| per 
cent; upon each claim on which the wells average more than 20 barrels and not 
more than 50 barrels per day per well for the calendar month, 14f per cent; upon each 
claim on which the wells average more than 50 barrels and not more than 100 bar- 
rels per day per well for the calendar month, 16f per cent; upon each claim on which 
the wells average more than 100 barrels per day per well for the calendar month, 
20 per cent. 

Only wells which have a commercial production during at least a part of the 
month shall be considered in ascertaining the average production herein, and the 
Secretary of the Interior shall determine what are commercially productive wells 
under this provision. 

The royalties on gas produced, if any, will be fixed and determined in each lease. 

20. Conditions for relief under section 19: 

A. For 'permit. — (a) That the land must not be in a naval petroleum reserve. 
(6) The applicant or his predecessor in interest must have been an occupant 

or claimant of the land on or before October 1, 1919, under a claim initiated under 
the placer mining laws, when the land was not withdrawn, provided that a trans- 
feree of such a claim subsequent to October 1, 1919, will not be permitted to hold 
permits under section 19 of the act to exceed 2560 acres in the same geologic struc- 
ture, nor for more than three times that area in the same State. 

(c) That claimant, by himself or predecessor in interest, must have performed 
all acts under the preexisting laws necessary to valid locations, except to make 
discovery. 

{d) That prior to February 25, 1920, claimant must have performed work or 
expended on or for the benefit of such locations an amount equal in the aggregate 
to $250 for each location. 

(e) That no claimant who has been guilty of any fraud or who had knowledge, 
or reasonable grounds to know of any fraud, or who has not acted honestly and in 
good faith, shall be entitled to any of the benefits of this section. 

(/) That claimant must, on or before August 25, 1920, file a rehnquishment to 
the United States of all right, title, and interest in and to the land, together with an 
application for a permit. This relinquishment may be in the form of an uncondi- 
tional quit-claim deed, duly executed and acknowledged, but not recorded, and when 
filed will be held for such action as the facts and the law in the case warrent and 
require. 

B. For lease. — The conditions necessary to obtaining a lease under section 19 
of the act are identical with those outlined in paragraphs {a), (6), (e), and (/), for 
permits, together with the following additional conditions: 

(a) That claimant must have made a discovery of oil or gas on or before Febru- 
ary 25, 1920. 

(6) That claimant must not be entitled to relief on the land in question under 
section 18 of the act. 

(c) That claimant must pay for one-eighth of the past production up to date of 
filing application for relief, exclusive of that used on the land for production pur- 
poses or unavoidably lost. 



APPENDIX 231 

21. Relief that may be granted under section 19: 

(a) A claimant qualified under the above conditions relating to permits, upon 
complying with the provisions of the act and these regulations, will be entitled to a 
prospecting permit upon the same terms, conditions, and limitations as to acreage, 
as other permits provided for in the act, substantially in form prescribed in section 6 
hereof. 

(6) A claimant quahfied under the above conditions relating to leases is entitled 
to a 20-year lease from the United States, effective from date of filing application 
for relief, substantially in the form prescribed in section 17 hereof, the royalty to be 
fixed by the Secretary of the Interior, but such royalty may not be less than 12^ per 
cent of all oil and gas produced exclusive of that used for production purposes on 
the land or unavoidably lost. In the event the land is in the geologic structure of 
proven territory at the time of granting the permit under this section, the royalty 
required under the lease based thereon shall not be less than 12^ per cent, but if 
at the time the permit is granted the land is not in proven territory the amount 
of royalty wiU be governed by the general terms of the act as set out in section 14 
thereof. 
22. Alaska claims — Conditions for relief under section 22: 

A. For -permit. — (a) That claimant must have been an occupant or claim- 
ant of the land on February 25, 1920, under a claim initiated under the placer mining 
laws by claimant or predecessors prior to November 3, 1910, the date of the Execu- 
tive order withdrawing all pubhc lands in Alaska containing petroleum deposits, 
including those in national forests. 

(6) That claimant must have performed all acts prior to November 3, 1910, 
under the then existing laws necessary to valid locations except to make discovery. 

(c) That claimant, (1) prior to November 3, 1910, must have made substantial 
improvements for the discovery of oil or gas on or for each location, or (2) prior to 
February 25, 1920, expended not less than $250 in improvements on or for the 
benefit of each location. 

{d) That claimant must on or before February 25, 1921, or within six months 
after final denial or withdrawal of application for patent, file a relinquishment to 
the United States of aU right, title, and interest in and to the land. This rehnquish- 
ment must be in the form of an unconditional quit-claim deed, duly executed and 
acknowledged, but not recorded, and when filed will be held for such action as the 
facts and the law in the case warrant and require. 

In addition to the above, the conditions outhned in paragraph (e) of section 20 
hereof are applicable to relief in Alaska. 

B. For lease. — The conditions necessary to obtaining a lease under section 22 
of the act are identical with those outlined in the paragraphs relating to permits 
in Alaska together with the following additional conditions: 

(o) That claimant or predecessors must have drilled an oil or gas well on the 
land to discover3^ 

(6) That claimant must pay for one-eighth of the past production exclusive of 
that used on the land for production purposes or unavoidably lost. 

23. Alaska claims — Relief that may be granted under section 22: 

(a) A claimant quahfied under the above conditions relating to permits, upon 
complying with the conditions of the act and these regulations will be entitled to 
prospecting permits under the same terms and conditions as other perniits in Alaska 



232 APPENDIX 

provided for in section 13 of the act, substantially in the form prescribed in section 
6 hereof. 

(6) A claimant qualified under the above conditions relating to leases is en- 
titled to a lease substantially in the form prescribed in section 17 hereof, the rental 
and royalty to be fixed by the Secretary of the Interior and specified in the lease, 
subject to readjustment at the end of each 20-year period of the lease. 

(c) Only five permits or leases in the aggregate may be held at any one time 
by any claimant, and not more than 1280 acres may be included in one permit 
under section 22 of the act. 

23^. Royalties and rentals on oil and gas leases in Alaska. — The 
royalties and rentals payable under oil and gas leases granted in Alaska pursuant 
to sections 14 and 22 of the act of February 25, 1920 (Pubhc No. 146), are hereby 
determined and prescribed as follows: 

(a) For leases granted under section 22 of the act, the royalty shall be: (1) For 
the first five years from and after the date of the lease, no royalty, except in the 
case of leases whereon the producing wells yield an average of 100 barrels or more 
per well per day for the calendar month, in which event the royalty shall be 5 per 
cent of all oil produced; (2) for the second period of five years from and after the 
date of each lease under section 22 of the act the royalty upon all leases shall be 5 
per cent; (3) for the succeeding 10 years the royalty upon all leases under section 
22 of the act shall be 10 per cent of all oil produced. 

(6) Upon leases granted in Alaska under section 14 of the act, the permittee who 
discovers oil will be entitled to a lease for one-fourth of the area of the permit with- 
out payment of royalty for the first five years succeeding the date of the lease and 
thereafter shall pay a royalty of 5 per cent upon all oil produced. On the remaining 
lands included within the area of the permit, the permittee will be given a prefer- 
ence right to a lease without payment of royalty for the first five years succeeding 
the date of the lease, except in the case of leases whereon the producing wells yield 
an average of 100 barrels or more per well per day for the calendar month, in which 
event the royalty shall be 5 per cent; for the second five years, the lessee will be 
required to pay a royalty of 5 per cent upon all oil produced, and for the succeeding 
10 years, a royalty of 10 per cent upon all oil produced. 

(c) No royalty will be charged in any case upon leases wherein the wells upon 
the lands average less than 10 barrels per well per day for the calendar month. 

(d) No rental upon any oil or gas lease in Alaska will be charged during the 
first five years succeeding the date of the lease. After the expiration of the first 
five years succeeding the date of the lease, a rental of 10 cents per acre per annum 
will be charged on all leases, payable in advance: Provided, That the rentals so 
paid for any one year shall be credited upon the royalties accruing for that year. 

(e) The royalties on gas produced, if any, will be fixed and determined in each 



24. Beneficiaries under leases or permits. — All leases or permits under 
sections 18, 19, and 22 shall inure to the benefit of the claimant and all persons 
claiming through or under him by lease, contract, or otherwise, as their interests 
may appear, subject to the same limitations as to area and acreage as is provided 
for claimant, but such persons will not necessarily be made parties to Government 
leases, and may assert their rights in the courts. Disputes of this character are 



1 



APPENDIX 233 

not to be confused with adverse claims based upon independent title, hereinafter 
referred to. (See sec. 28 hereof.) 

24^. Who may apply. — All proper parties to a claim for relief under section 
18, 19, or 22 of the act should join in the apphcation, but, if for any sufficient reason 
that is impracticable, any person claiming a fractional or undivided interest in such 
claim may make application for a lease or permit, stating the nature and extent of 
his interest, and the reasons for nonjoinder of his co-owner or co-owners. In cases 
where two or more applications are made for the same claim or part of a claim, 
leases or permits will be granted to one or more of the claimants, as the law and 
facts shall warrant and as shall be deemed just. 

25. Form and contents of application. — No set forms of application for a 
lease under section 18, 19, or 22, or a permit under section 19 or 22 of the act can 
be prescribed because the facts and circumstances pertaining to claims for relief 
are so varied. Applications for such leases or permits must be made under oath 
and the supporting documents and papers certified or under oath so far as prac- 
ticable. The application, with all the accompanying papers, should be filed in the 
United States land office of the district in which the land is situated. Applications 
and supporting papers need not be executed in duplicate, but one complete copy of 
each apphcation and supporting papers (except abstract of title) should be filed with 
the apphcation, which copy will be transmitted by the register and receiver to the 
Chief of Field Division and notation to that effect made on the original. The ap- 
plication should contain full information as to the facts upon which the applicant 
rehes for rehef, covering the following points and such additional matters as may, 
from the pecuhar facts in the case, be material in the estabhshment of his claim un- 
der the law: 

(a) Date of apphcation for lease or permit. 

(6) Apphcant's name, post-office address and citizenship. 

(c) Description of land. — The land for which the apphcation is made must be 
described by legal subdivisions of section, township, and range, if surveyed; if not 
surveyed, then by metes and bounds and courses and distances from some per- 
manent monument. If the application is for a lease of unsurveyed land, the ap- 
plicant, after he has been awarded the right to a lease, but before issuance thereof, 
will be required to deposit with the United States surveyor general of the State 
in which the land is situated the estimated cost of making a survey of the land, 
the balance, if any, after the survey is completed to be returned. 

(d) Origin and basis of applicant's claim for relief. — The applicant must bring 
his claim clearly within all the requirements of the act as specifically pointed out 
in sections 18, 20, and 22 of these regulations. Every application must be sup- 
ported by a duly certified abstract of title to the land brought up to the date of filing 
the application. In the event an abstract of title is already on file in the Land De- 
partment, a supplemental abstract extending over the period or periods not covered 
by the former may be furnished, and if furnished will be considered in connection 
with the abstract already on file. If any fraud has been committed in connection 
therewith, then a full affirmative showing must be made by the apphcant to the 
effect that he has not been a party to such fraud, and that he has not been guilty 
of any fraud or had knowledge of fraud or reasonable grounds to know of any fraud 
in connection with his claim. If an application for patent has been filed, a brief 
resume of the actions taken thereon should be stated. If the land is or has been 



234 APPENDIX 

involved in litigation in the courts to which the United States is a party, the status 
or result of such Htigation should be furnished. 

(e) Particulars as to conflicting claims or interests. — All confhcting or disputed 
claims, if any, to the land or production therefrom, specifying the character and 
extent of such interests, must be shown. 

(/) Discovery. — Before a lease may be awarded under the relief sections of the 
act it must be satisfactorily shown that the applicant or his predecessors have 
drilled a well to a substantial and certain discovery of oil or gas in a producing stra- 
tum on the land covered by the location under which the applicant is asserting his 
claim. 

(g) Wells, improvements, and production. — With each application for a lease 
under section 18, 19, or 22 of the act there must be filed a complete and detailed 
statement showing the number, depth, condition, and present daily production of 
aU wells drilled on the land by the applicant and his predecessors in interest, and 
the nature and extent of all other improvements placed thereon by them. 

With each application for a premit under section 19 or 22 of the act, a description 
of the work performed and improvements made upon or for the benefit of the lo- 
cation by the applicant and his predecessors must be filed, together with an itemized 
statement of the cost thereof. If the application is made under section 22, the date 
the work was performed or the improvements made must also be shown. 

In either case applicant must show the position of all wells and improvements 
by courses and distances from the nearest corner of the public land survey, if the 
land is surveyed; if not surveyed, then from a corner of the claim. This may be 
shown by means of a diagram. 

(h) Amount and value of past production. — Claimant must furnish a com- 
plete detailed statement, by months, of all past production from the land, up to 
the date of fihng the application and relinquishment, showing (1) the grade and 
total quantity of oil and gas produced; (2) the amount sold or otherwise disposed 
of, to whom sold, and the selling price or other consideration received therefor; 
(3) a statement of the grade and amount of any and all such production held in 
storage, when produced, and the value at time of production; and (4) the amount 
consumed for production purposes on the land, or unavoidably lost. 

Copies of any and all contracts under which oil or gas produced from the land 
has been or is being sold or otherwise disposed of must be furnished. 

(i) Inspection of records. — The agreement on the part of the applicant to per- 
mit the inspection of any and all books, records, and accounts having any bearing 
on the data or information required by the application and to furnish copies or 
abstracts of such books, records, or accounts, on demand. 

(j) Interest in other leases and permits. — The applicant will also furnish a com- 
plete statement of all lands for which he has filed application for lease or permit 
under sections 18, 19, and 22 of the act, and of such lands as are included in other 
applications in which he has any direct or indirect interest, together with a full 
disclosure of such interest by stock ownership or otherwise. If the applicant is a 
corporation, a certified copy of its articles of incorporation must be furnished, and a 
full disclosure made of the ownership of its stock, whether such stock is owned, held, 
or controlled directly or indirectly by any other person or corporation, who or which 
is an applicant for or a holder of a lease under said sections, and, in the event of 
such ownership, a description of the legal subdivisions of all the lands affected there- 



APPENDIX 235 

by is required. Lists of stockholders need not necessarily be filed in the local land 
offices, but may be filed directly mth the Commissioner of the General Land Office, 
where they will be kept confidential except for Government purposes. In the event 
the lands so affected are not surveyed they may be described by the usual method 
of courses and distances and acreage. 

(k) Limitation of area. — Apphcations for lease under section 18 of the act 
should disclose all other apphcations in which the applicant is directly or indirectly 
interested, for lease under said section for lands (describing same) in the same ge- 
ologic structure; and applications under section 22 of the act should show all other 
apphcations for leases or permits under said section. The boundaries of the ge- 
ologic structures of the various producing fields will be determined and announced 
by the United States Geological Survey under supervision of the Secretary of the 
Interior, and such information will be placed on file in all United States land offices. 

(l) Interests of beneficiaries. — In applications for lease the nature and extent of 
the interests of all beneficiaries thereof by virtue of operating contracts or otherwise, 
not covered by paragraph 25 (j), must be disclosed, together with a full showing 
of all their interests in other leases or apphcations for leases under this act. If the 
beneficiary is a corporation or joint-stock company, a full disclosure must be made 
of the ownership of its stock and the residence and citizenship of its stockholders. 

26. Payment of royalty on past production. — The apphcation must be 
accompanied by a certified check in the amount of one-eighth of the gross value of 
aU oil and gas produced and sold or held in storage, as per the statement required 
in paragraph 25 (h). All such sums will be held by the receiver in his account of 
"Trust funds — Unearned moneys" to await instructions as to their disposition. 
In heu of the certified check herein required, the applicant may be permitted to 
deposit a bond by approved surety company in an amount not less than one-eighth 
of the estimated gross value of all oil and gas produced and sold or held in storage, 
securing the payment to the United States within 30 days from the award of the 
lease of the cash value of the past production due the United States under this 
act. In cases where the proceeds, or part thereof, of such past production have 
been deposited in escrow, pursuant to operating agreements under the act of August 
25, 1914 (38 Stat., 708), or where in suits brought by the Government affecting such 
lands the proceeds of production, or part thereof, have been impounded in the cus- 
tody of receivers, a formal tender may be made of the funds so held in escrow or 
impounded to the extent available or in the amount necessary, as the case may be, 
in heu of such cash payment. In such cases the interest accumulating on such es- 
crowed or impounded moneys after the tender is made will go to the Government. 

Liberty bonds will be accepted at original cost in payment of royalty on past 
production in such proportion as the escrowed or impounded moneys have been 
invested therein. 

Operating contracts made under the provisions of the act of August 25, 1914, 
supra, and in operation at the time of such tender, will not be terminated until 
the entire transaction of granting a lease and payment of royalty on past production 
shall have been consummated; nor will the Department of Justice be requested to 
dismiss any suits involving the land affected until the application for a lease has 
been adjudicated and approved; whereupon, after the suit has been dismissed and 
the impounded money tendered paid over to the Government, the lease will be 
executed and dehvered. 



236 APPENDIX 

27. Publication of notice. — Immediately upon the filing of an application 
for a lease or permit under section 18, 19, or 22 of the act, the register and receiver 
will cause to be published, at the expense of the applicant, in a newspaper desig- 
nated by the register, published in the vicinity of the land and most likely to give 
notice to the general pubhc, a notice of the said application in substantially the fol- 
lowing form: 

Department of the Interior 
united states land office 



, 19-. 

Notice is hereby given that , of , has applied for an oil 

and gas under section of the act of February 25, 1920 (Public No. 

146), for section , township of range , meridian, 

county. State of , Any and all persons having adverse or conflicting 

claims to said land are hereby notified that a full statement, under oath, of such 
claim should be filed in this office showing a superior right to a permit or lease under 
said act or a valid existing adverse or conflicting claim to the land or the minerals 

therein under the public-land laws, on or before ; otherwise such claim may 

be disregarded in granting the permit or lease applied for. 



Register. 

The register and receiver will fix a date in the notice on or before which ad- 
verse or conflicting claims may be asserted, which date should be not less than 30 
nor more than 40 days after the date of first pubhcation of the notice. 

Such notice will be published in the regular issue and not in any supplement of 
the newspaper, once each week for a period of five consecutive weeks if in a weekly 
paper, or if in a daily paper for a period of 30 days. The register and receiver will 
post a copy of said notice in a conspicuous place in their office during the period of 
publication. 

Upon the applicant's furnishing satisfactory proof of such publication, but not 
earlier than the day following that set in the published notice on or before which 
adverse or conflicting claims were to be filed, the register and receiver will transmit 
by special letter all papers in the case, including any adverse or conflicting claims 
that may have been filed, together with proof of posting said notice in their office, 
to the Commissioner of the General Land Office. 

28. Adverse or conflicting claims — Procedure. — In case of adverse or 
conflicting claims for leases under section 18, 19, or 22, or permits under section 19 
or 22, the Secretary of the Interior is clothed with authority to grant leases or per- 
mits, as the case may be, to one or more of them, as shall be deemed just. 

(a) To have their claims considered in connection with the awarding of leases 
or permits it will be necessary for adverse claimants to make full showing (1) of a 
superior right to a lease or permit under this act, or (2) a superior right under some 
other public-land law. If the former, the conflicting claimant must make out a 
complete case in his own behalf as required by these regulations on or before August 
25, 1920. 

(6) Upon receipt of the application and showing of an adverse claimant the 



APPENDIX 237 

Commissioner of the General Land Office will consider same. If, in his judgment, 
the adverse claimant has failed to make a prima facie case showing that he is en- 
titled to a lease or permit, as the case may be, for at least part of the land, his ap- 
plication will be rejected, subject to appeal to the Secretary of the Interior. But 
if the adverse claimant makes out a prima facie case the commissioner will take 
such course as may be advisable under the circumstances of each particular case 
to settle and adjust the rights or the respective parties, and may, if deemed neces- 
sary, order a formal hearing to settle disputed questions of fact. In the absence 
of appeal to the Secretary of the Interior from the final order or decision of the Com- 
missioner same shall be conclusive. 

29. Compromises under section 18a. — No special procedure will be outhned 
under this section. Any request for a compromise or settlement under this section 
which may be filed in the Land Department wiU be transmitted to the President 
with such report as may be deemed advisable under the circumstances of the par- 
ticular case. In case the land is in a naval petroleum reserve the Navy Depart- 
ment will be consulted before making such report. 

IV. — RIGHTS OF WAY FOR PIPE LINES 

30. Section 28 of the act grants to any appHcant having the qualifications out- 
lined in section 1 of these regulations rights of way through pubhc lands of the United 
States, including national forests, for pipe-line purposes for the transportation of 
oil or natural gas, on condition that the pipe lines for which rights of way are granted 
shall be operated and maintained as common carriers. The grant carries with it 
the right to the use of the ground actually occupied by the pipe line, and 25 feet 
on each side thereof for the purpose of construction, maintenance, and operation 
of the pipe fine. Applicants for rights of way under this act will be governed by 
the regulations set forth in circular of June 6, 1908 (36 L. D., 567), in so far as ap- 
phcable, appropriate changes being made in the forms therein prescribed to make 
them appHcable to right-of-way cases arising under the act of February 25, 1920 
(public No. 146), for pipe fines to be constructed, maintained, and operated as 
common carriers. Failure on the part of grantee to fulfill the conditions imposed 
by the act shall be ground for forfeiture of the grant by the United States district 
court for the district in which the property, or some part thereof, is situated. 

v. — FEES AND COMMISSIONS 

31. Under the authority of section 38 of the act, the following fees and com- 
missions are prescribed for transactions under the act: 

(a) For receiving and acting on each application for a permit, lease, or other 
right filed in the district land office in accordance with these regulations, there shall 
be paid a fee of $2 for each 160 acres, or fraction thereof, in such application, but 
such fee in no case to be less than $10, the same to be paid by the appHcant and con- 
sidered as earned when paid, and to be credited in equal parts on the compensa- 
tion of the register and receiver within the limitations provided by law. 

(6) A commission of 1 per cent on all moneys received in each receiver's office, 
to be equally divided between the register and receiver; such commission will not 
be collected from the applicant, lessee, or permittee in addition to the monej-s other- 
wise provided to be paid. 



238 APPENDIX 

It should be understood that the commission here provided for will not affect 
the disposition of the proceeds arising from operations under the act as provided 
in section 35 thereof; also that such commission will be credited on compensation 
of registers and receivers only to the extent of the limitation provided by law for 
maximum compensation of such officers. 

VI. — REPEALING AND SAVING CLAUSES 

32. Section 37 of the act provides that hereafter the deposits of coal, phosphate, 
sodium, oil, oil shale, and gas, referred to and described therein, may be disposed 
of only in the manner provided in the act "except as to valid claims existent at 
date of passage of this act, and thereafter maintained in comphance with the laws 
imder which initiated, which claims may be perfected under such laws, including 
discovery. 

Stated negatively under this section of the act the following classes of oil or 
gas placer locations, so called, notwithstanding absence of fraud and fuU comphance 
with law in other respects, may not proceed to patent, viz: 
(a) Any location made after withdrawal of the land. 

(6) Any location made before withdrawal of the land, but not perfected by dis- 
covery at date of withdrawal, which does not come within the protective proviso of 
section 2 of the act of June 25, 1910 (36 Stat., 847); that is to say, any claimant 
who, at date of withdrawal, was not a bona fide occupant or claimant in diligent 
prosecution of work leading to discovery of oil or gas, and who has not continued 
in such diligent prosecution to discovery. 

(c) Any location on lands not withdrawn, on which, at the date of the act, the 
claimant had not made discovery or was not in diligent prosecution of work leading 
to discovery, and does not continue such work with dihgence to discovery. 

Clay Tallman 

Commissioner. 
Approved: 

John Barton Payne, 
Secretary. 



DIGEST OF DECISIONS AND OPINIONS IN CONNECTION 
WITH THE ADMINISTRATION OF THE ACT OF FEBRU- 
ARY 25, 1920, AS APPLIED TO OIL AND GAS 



Permits for lands in Government reclamation projects. 

In the case of permits issued for lands within reclamation withdrawals the fol- 
lowing additional conditions will be included in the permit: 

7. (6) To reimburse damage sustained by any reclamation homestead entry- 
man pursuant to the requirements of paragraph 8 hereof: (c) To pay any damage 
caused to any reclamation project or the water supply thereof by failure to comply 
fully with the requirements of paragraph 9 hereof. 

8. That as to any lands covered by this permit which are also embraced in any 
reclamation homestead entry with a reservation of the oil and gas to the United 
States, permittee shall reimburse the entryman for all damage to crops or improve- 
ments caused by such driUing or other operations, such damage to include reim- 
bursement of the entryman by the permittee of all reclamation charges for construc- 
tion, operation, and maintenance for the portion of the land used and occupied by 
the permittee during the period of such use and occupation. 

9. That as to any lands covered by this permit within the area of any Govern- 
ment reclamation project or in proximity thereto the permittee shall erect such 
dikes and embankments or take such other precautions as may be necessary, as 
required by the project manager, effectively to impound any flow of refuse oil, salt 
water, or oil from wells drilled, to prevent any injury to lands susceptible of irri- 
gation under such project or injury to the water supply thereof. 

In such case the following form of bond will be required: 



Depahtment of the Interior 
general land office 



U. S. Land Office 
Serial number 



Bond of oil and gas permittee. 

[Act of Feb. 25, 1920 (Public No. 146).] 

Know all men by these presents, That of State of 

as principal, and of State of , as surety, are held and 

firmly bound unto the United States of America, for the use and benefit of the 
United States and of any reclamation homestead entryman on any of the herein- 
after described lands embraced in that certain prospecting permit hereinafter re- 
ferred to, in the sum of S5000, lawful money of the United States, for which payment, 
well and truly to be made, we bind ourselves, and each of us, and each of our heirs, 
executors, administrators successors, and assigns jointly and severally by these 
presents. 

239 



240 APPENDIX 

Signed with our hands and sealed with our seals this day of , 19 — . 

The condition of the foregoing obligation is such that, whereas the said prin- 
cipal has been granted under the act of February 25, 1920, PubUc No. 146, a per- 
mit (Serial No. ) to prospect for oil and gas for two years, upon the follow- 
ing described lands: , 

on condition that the permittee shall (a) repair promptly, so far as possible, any 
damage to the oil strata or deposits resulting from improper methods of operation; 
(6) reimburse any homestead entryman of land covered by said permit for all 
damage to crops and improvements caused by drilling or other operation by the per- 
mittee, such damage to include reimbursement of the entryman by the permittee 
of all reclamation charges for construction, operation and maintenance for the 
portion of the land used and occupied by the permittee during the period of such use 
and occupation by the permittee; and (c) erect such dikes and embankments or 
take such other precautions as may be necessary, as required by the project man- 
ager, effectively to impound any flow of refuse oil, salt water, or oil from wells drilled, 
to prevent any injury to lands susceptible of irrigation under any government ir- 
rigation project or injury to the water supply thereof. 

Now, therefore, if said principal shall promptly and in all respects comply with 
said conditions, then the above obhgation shall be void and of no effect; otherwise 
and in default of full and complete compliance therewith the said obHgations shall 
remain in full force and effect. 

Signed, sealed and delivered in the presence of: 
(Name and address of witnesses.) 



Principal. 



Surety. 



[L. S.] 
[L. S.] 



Permits for deposits reserved under act of July 17, 1914 (38 Stat., 509). 

In the case of permits issued for deposits of oil or gas reserved to the United 
States under the provisions of the act of July 17, 1914 (38 Stat., 509), the following 
additional condition will be included in paragraph 7 thereof: 

(6) To reimburse any entryman or owner of any portion of said lands hereto- 
fore entered with a reservation of the oil and gas deposits to the United States made 
pursuant to the act of July 17, 1914 (38 Stat., 509), for any damage to the crops and 
improvements of such entryman or owner resulting from drilUng or other prospect- 
ing operations. 

In such case the following form of bond will be required: 

Department op the Interior 
general land office 

U. S. Land Office . 

Serial number 

Bond of oil and gas permittee. 
[Act of Feb. 25, 1920, Pubhc No. 146.] 
Know all men by these presents. That , of , State of 



as principal, and , of , State of , as surety, are held and 



I 



APPENDIX 241 

firmly bound unto the United States of America, for the use and benefit of the United 
States, and of any entrj-man or owner of any of the hereinafter described lands 
embraced in that certain prospecting permit hereinafter referred to, in the sum of 
$1000 lawful money of the United States, for which pa3'ment, well and truly to be 
made, we bind ourselves, and each of us, and each of our heirs, executors, adminis- 
trators, successors, and assigns, jointly and severally by these presents. 

Signed with our hands and sealed with our seals this day of , 19 — . 

The condition of the foregoing obligation is such that, whereas the said prin- 
cipal has been granted under the act of February 25, 1920, Pubhc No. 146, a permit 
(Serial number ) to prospect for oil and gas for two years upon the follow- 
ing lands: on condition that the permittee shall (a) repair promptly, 

so far as possible, any damage to the oil strata or deposits resulting from improper 
methods of operation; (6) reimburse any entryman or owmer of any portion of said 
lands heretofore entered with a reservation of the oil and gas deposits to the United 
States made pursuant to the act of July 17, 1914 (38 Stat., 509), for any damage to 
the crops and improvements of such entryman or owner resulting from drilhng or 
other prospecting operations. 

Now, therefore, if said principal shall promptly and in all respects comply with 
said conditions, then the above obhgation shall be void and of no effect; otherwise 
and in default of full and complete compliance therewith the said obhgations shall 
remain in full force and effect. 

Signed, sealed, and delivered in the presence of: 

(Name and address of witness.) 

; [L.S.] 

Prmcipal. 

[L. S.] 



Surety. 



Attorneys in fact. 

In making applications for lease or permit corporations may act by attorneys 
in fact. Individuals and associations of individuals should execute their own papers. 
Limitation of holdings. 

A corporation (except under the relief sections) ma\^ not have an interest in 
more than three leases, either directly as a lessee, or indirectly as a stockholder in 
a corporate lessee. An individual may hold stock in any number of corporations 
holding leases provided his stock interests do not represent a greater acreage than 
2560 in the same producing structure, or 7680 acres in the same State. 
Alien ownership. 

Ahens may not have any direct holding of lease under the oil-leasing act, but 
may be stockholders in American corporations holding leases, provided the laws of 
their country do not deny hke privilege to American citizens. American corpora- 
tions, some of whose stock is owned by aliens, may make apphcation for lease with 
a full disclosure of the residence and citizenship of its stockholders, and the depart- 
ment vnll then determine whether a lease may be granted. 
Conflicting preference rights under sections 19 and 20. 

The preference right attaches to the claim first initiated and legally maintained. 
A locator of a mining claim who has complied with all the provisions of section 19 



242 APPENDIX 

of the act will be entitled to a preference right over a homestead entryman whose 
entry was made after the location, the homesteader, however, being entitles to hold 
the surface right. If the homestead entry was made prior to the date of the placer 
location, the homestead claimant will have the superior right, except in the case of 
a stock-raising homestead, wherein all minerals are reserved to the United States. 
Permit for unwithdrawn land covered by agricultural entry. 

No permit will be granted until entryman has elected to take patent with reser- 
vation of oil and gas to the United States. If such a waiver is filed, entryman may 
then exercise his preference right, if any, to permit for lands covered by such entry. 
Preference rights under section 20. 

Preference rights under section 20 exists in cases where entry was made prior 
to February 25, 1920, for unwithdrawn or unclassified lands, without any reservation 
of the minerals by the United States, and thereafter the claimant files a waiver of 
his right under the entry to the oil or gas. No preference right exists where land is 
covered by stock-raising entry, nor where entry is made subject to the act of July 
17, 1914, with oil and gas reservations. 
Assignability of permits. 

Assignment of a mere right to a permit will not be recognized, but after permit 
is granted it may be assigned upon consent of the Secretary of the Interior first 
hand and obtained. 
Incontiguous tracts. 

Incontiguous tracts within a limited radius may be included in a permit where 
conditions are such that, because of prior disposals, a reasonable area of contiguous 
land can not be procured. 
Pending application for permit, land designated as oil structure. 

Where after application under section 13 for a permit and before permit is granted 
the land is designated as within the structure of a producing oil or gas field, permit 
can not be allowed. 
Preference right under section 20. 

A permit to prospect will be granted an applicant entitled thereto under section 
20 of the act, notwithstanding the land is part of a producing oil structure, but 
only one permit may be granted in the same structure to the same apphcant. 
Carey Act segregation as affected by leasing law. 

The lands in a Carey Act segregation come under the provisions of section 2 of 
the oil and gas regulations, and permits and leases may be granted for such lands, 
subject to such stipulations and requirements as the Government may impose for 
the protection of the reclamation project, to the end that the best development of 
the lands, both for mineral and agricultural purposes, may be accomphshed. 

Neither the State nor its contractor would be entitled to any preference right 
under section 20 of the act, and whether a Carey Act entryman would have such a 
right would depend upon the conditions affecting his entry being such as to bring 
him within the provisions of section 20. 
Office practice — Conflicting applications. 

The issuance of a permit should be deferred, where all is regular and the ap- 
plicant appears entitled to the permit, until the conflicting applicants have been 
notified that their applications have been rejected, because subsequent in time, 
subject to the right to-show cause or to appeal within 15 days from receipt of notice. 



APPENDIX 243 

Posting notice by agent. 

Under the law, the action of an agent in posting notice is the action of his prin- 
cipal, but the appHcation for permit may not be executed by agent, unless apphcant 
is a corporation. 
Permits of corporations as affected by stockholders' permits. 

The maximum number of permits to a corporation under section 13 of the act 
is not limited by permits of individual stockholders, but a corporation may not have 
an interest in more than three permits in same State, nor in more than one in the 
same geologic structure, directly or indirectly. An individual may hold a direct 
interest in not more than three permits and his total interest as permittee and stock- 
holder may not exceed an aggregate of 7680 acres in the same State, or 2560 acres 
in the same geologic structure. 
Preference right permits to qualified assignees. 

Section 19 of the act of February 25, 1920, is construed to permit qualified as- 
signees since October 1, 1919, to secure preference right permits, but no such trans- 
feree will be permitted to hold permits exceeding 2560 acres for such lands in the same 
geologic structure, nor more than three times that area in the same State. 
Permits in Alaska. 

The same rule apphes in Alaska as in the States; that is, not more than one 
permit in same structure. 
Rights under " paper locations." 

Arguments have been presented in favor of a construction of section 37 of the 
leasing act, that would have the result of validating so-called " paper locations " 
of placer mining claims, and assuring the ultimate right to absolute patent to such 
claims in case of discovery. Such locations consist merely of setting stakes to in- 
dicate the boundaries, posting a notice, and perhaps fihng that notice in a proper 
recording office. It is understood that practically aU the pubhc domain having 
known possible prospective value for oil, is covered by such locations. It is not 
beUeved that Congress had any such intention or that the language of the act justi- 
fies any such conclusion. 

Under the express requirements of the mining laws and the decisions of the 
courts covering a long period of years, discovery of mineral has been the sole basis 
for the location of a mining claim. Without such discovery, the mere posting of 
notices and marking the boundaries creates no right whatever. 

The mining law gives the right to any citizen to explore the public domain for 
the purpose of finding mineral; hence, the courts have protected a citizen in actual, 
physical possession of a prospective claim on the public domain, while he is engaged 
in dihgent prosecution of work leading to the discovery of mineral, but this is as 
far as the courts have gone. As apphed to oil lands, this rule was well stated by 
the Supreme Court of California, in the case of McLemore v. Express Oil Company 
(158 Calif., 559), in the following language: 

But where the location is incomplete no question of assessment work is involved. 
What the attempting locator has is the right to continue in possession, undisturbed 
by any form of hostile or clandestine entry, while he is dihgently prosecuting his 
work to a discovery. This diligent prosecution of the work of discovery does not 
mean the doing of assessment work. It does not mean any attempted holding, by 
cabin, lumber pile, or unused derrick. It means the dihgent, continuous prosecution 



244 APPENDIX 

of the work, with the expenditure of whatever money may be necessary to the end 
in view. 

These propositions of law were reiterated by the United States Supreme Coiu-t 
as recently as March 15, 1920, in the case of Cole v. Ralph. 

From the foregoing it will be seen that no rights whatever could be obtained by 
mere staking and posting unless such act was followed up with dihgent and con- 
tinuous work leading to discovery. Section 37 of the new leasing act excepts from 
the operation of that act " valid claims existent at date of passage of this act and 
thereafter maintained in compUance with the laws under which initiated, which 
claims may be perfected under such laws, including discovery." Obviously a valid 
claim under the former law is one that the courts and the Land Department wiU 
protect and respect as against the claims of others. The mere staking and posting 
of notices do not constitute such a claim, and the regulations so hold. 

Any other view as to the construction of section 37 is inconsistent with the 
provisions of other sections of the leasing law. Section 19 provided for relief, so- 
called, for those persons who initiated claims on the public domain at a time when 
the lands were not withdrawn or classified, and who, at the date of the act, had not 
perfected such claims by discovery, and if further provides that where such a claim- 
ant had expended an amount equal in the aggregate to $250 toward the development 
of his claim, such claimant, if in good faith and the claim was initiated prior to Oc- 
tober 1, 1919, would be entitled to a prospector's permit for the area embraced in 
his claim. 

The provisions of the reHef sections (18, ISa, 19, and 22), were the subject of 
extended consideration by the committees of Congress, and it is clear that the pro- 
visions of section 19 are just as far as Congress intended to go in the protection of 
claims and locations of the class here under discussion. To construe the act as 
vaHdating mere "paper locations" would be placing Congress and this department 
in the position of saying that one who had expended $250 on his claim would be 
entitled only to a prospecting permit, while one who had only a stake and notice 
would be left with the privilege for an indefinite time of ultimately getting absolute 
title. It is further argued that under the act claimant has the option of taking a 
reUef permit under section 19 or standing on his " paper location " under section 37. 
One might as logically argue that claims for relief under section 18, over which 
there has been so much controversy, may now go to absolute patent by virtue of 
section 37. Congress never contemplated any such anomalous situation. 

If the view urged in these arguments were adopted there would be Uttle use for 
a leasing act for oil lands outside the withdrawn areas, and perhaps for lands within 
such areas. The purpose and policy sought to be accomphshed by this important 
legislation would be largely negatived, and the States and the Reclamation Serv- 
ice would be deprived of funds they are counting on for development purposes. 
Moreover, there is no practical necessity for the construction urged to protect any 
legitimate interest. The new law is liberal in the extreme in giving all good-faith 
claimants, who have made any material expenditures on the ground, fair and reason- 
able opportunity to transmute such claims into permits and leases under the new 
law under far more practical working conditions than existed under the former 
laws. 



APPENDIX 245 

Oil-land leases — Stock-raising homesteads. 

The question has arisen as to whether or not the provisions of section 20 of the 
leasing act are applicable to lands covered by stock-raising homestead entries. 

Section 20 is one of the so-called relief sections of the law, all of which sections 
are based upon alleged equities of the persons to whom a preference right to a per- 
mit or lease is accorded. It was designed to recognize the equities of persons who 
had gone upon the pubUc domain and made homestead entries under the 160 or 
320 acre homestead law, neither of which contains any reservation of minerals, 
upon the theory and under the behef that they were obtaining an unrestricted title 
to the land. Because of a subsequent withdrawal or classification of the land as 
mineral after the allowance of their entries, and after they had. spent their time and 
money upon the land, they were under the necessity of either losing the land entirely 
or accepting a patent under the provisions of the act of July 17, 1914, reserving the 
oil and gas deposits in the land to the United States. No such equity or reason 
exists in the case of entries under the 160 or 320 acre homestead law made upon 
lands theretofore withdrawn or classified as mineral, because the entryman knew 
at the time he made the entry that the mineral was known and reserved to the United 
States, and the most he could obtain was a patent expressly excluding the oil and 
gas deposits. This is true of all stock-raising homestead entries; for by the terms 
of the act itself all minerals within the land are expressly reserved to the United 
States, together with the right to enter upon the lands, mine and remove the same. 

Lands within stock-raising homestead entries need not be withdrawn or classi- 
fied for the purpose of preventing disposition of minerals under the agricultural 
land laws, because the minerals are reserved in the law itself. It is, therefore, clear 
that Congress, when it used in section 20 of the leasing act, the words " lands bona 
fide entered as agricultural and not withdrawn or classified as mineral at the time 
of entry," had in mind only the entries under the 160 or 320 acre homestead law, 
which contains no reservation or classification of mineral, and where subsequently, 
by reason of a withdrawal or classification, the entryman was, as stated above, under 
the necessity of accepting a restricted patent. Any other construction of the stat- 
ute would involve the disregarding of the language " and not withdrawn or classi- 
fied as mineral at the time of entry." 

The regulations specifically state that the preference right under section 20 of 
the act exists only where the land was entered prior to withdrawal or classification, 
and subsequent to entry was withdrawn or classified as oil or gas bearing in character. 
This clearly could have no application to entries under the stock-raising homestead 
law, where all minerals are reserved and where no withdrawal or classification is 
necessary. 
Preferential rights of agricultural claimants. 

Whatever preferential rights homesteaders or otner agricultural entrymen as 
such may have to oil permits or leases must be found in section 20 of the act. While 
this section is not as clear and specific in some respects as might be desired, it is 
apparent that the class of entrymen or patentees on which Congress intended by 
this section to confer a preference right is those who made their entries when the 
land was not withdrawn or classified as mineral, and who were therefore permitted 
to make their entries without any reservation of the mineral to the Government, 
but were or will be compelled to take a patent with the reservation because of a 
withdrawal or classification of the land, or because in the meantime the land has 



246 APPENDIX 

become of known mineral character, before submission of final proof. It is also 
apparent that this section is in the nature of a relief provision, designed to take 
care of those who found themselves in the situation above described at the time the 
act was passed, and not intended to provide generally for the disposition of mineral 
rights under the homestead law in the future. 

With these general propositions in mind, the following specific statements may- 
be made: 

1. If the land was withdrawn or classified at the time of entry so that the entry 
was made with a reservation of the mineral, there is no preference right. Conversely, 
to entitle the homesteader to a preference right the entry must have been properly 
made without a reservation of the mineral. 

2. There can be no preference right on an entry allowed after February 25, 
1920. See section 12 of the regulations. 

3. There can be no preference right on a stock-raising entry under the act of 
December 29, 1916, for under that act all entries are made with a reservation of the 
mineral. 

4. If the homestead entry was made without reservation of the mineral, but 
after the lands were of known mineral character, and for the purpose of acquiring 
mineral rights, there is no preference right to a permit because (a) such an entry 
should have been made with a reservation of the mineral and the requisite non- 
mineral affidavit on which the entry was procured was fraudulent, and (6) the entry 
is not " of lands bona fide entered as agricultural." 

5. But where one has an original entry under the 160 or 320 acre law and an 
additional entrj^ under the stock-raising (640-acre) law, the entryman will have the 
same rights under the original as he would have had had he not made the additional. 

6. Where one has an entry without a reservation of the mineral, nobody (not 
even the entryman himself) may acquire a permit or lease for the mineral so long as 
the entry stands in that shape. 

7. But if the entryman in the case last above mentioned files a waiver of the 
mineral rights in the land, then he may exercise his preference right, if he has any, 
and if not, others may file application for a mineral permit or lease. 

8. The " reservation " of the mineral above referred to is pursuant to section 
2 of the act of July 17, 1914 (38 Stat., 509), which provides that the mineral occupant 
shall pay any damage caused to the agricultural claimant. 

9. Where a patented entry, or one on which final certificate has issued, has been 
sold or transferred, the transferee would have the same rights as the entryman, 
provided he acquired the land before January 1, 1918, but if he acquired it after 
that date, there would be no preference right in anybody. 

10. A patentee, or entryman with final certificate, with a reservation of the 
mineral to the Government, who has a preference right can not withhold the land 
from development indefinitely. Section 12 of the regulations provides that if any- 
body else applies for a permit on the land, the preference-right man shall be given 
notice and allowed 30 days within which to exercise his preference and apply for a 
permit himself; otherwise he will be out. 

11. The preference-right claimant must be qualified to take a permit under the 
law the same as anybody else; for instance, an alien transferee of patented land 
could not get a permit or lease; one who has already received the limit of permits 
allowed could not get a permit. 



APPENDIX 247 

12. The matter of whether the agricultural entry on which a preference right 
to a permit is predicated is within or without a known producing structure cuts 
no figure in connection with the preference rights here under consideration, provided 
that only one permit may be granted to the same structure. 

13. In case of conflict between a preference-right claimant under sections 18 and 
19 and one under section 20 the one would prevail whose rights were prior in their 
laAvful inception. 

Conflicts between nonmineral claims and oil placers. 

When an otherwise valid oil placer location is perfected by discoverj^ the land 
is not subject to other appropriation so long as the mining claim is maintained, and 
should it be entered or applied for under some other law prior to the filing of an 
application for patent by the mining claimant the burden of protecting his claim by 
contest will rest upon him. This is necessarily so, as the land is not segregated from 
record entry by a mere mining location of which the land department has no record. 

An oil placer location, perfected by discovery, laid over land embraced in a prior, 
valid, subsisting homestead entry, is ineffective so long as the homestead stands. 
(Prior to the act of July 17, 1914, the mineral claimant could contest the homestead 
and cause its cancellation; under that act the homesteader may retain surface rights 
and the mineral is automatically withdrawn; and under the leasing act the home- 
steader might have a preference right to a permit for the mineral.) A stock-raising 
homestead is an exception to this rule, for all minerals are reserved therefrom, and 
the oil deposits could have been located under the placer law up to February 25, 1920. 

A mere '' paper " oil placer location (that is, one without a discovery) will not 
prevent a homestead entry for the land, but where the claimant of a " paper location" 
is on the ground in dihgent prosecution of work leading to discovery at the time the 
land is homesteaded, he may by contest defeat the homestead entry. 

The allowance (after Feb. 25, 1920) of a homestead entry on land covered by 
vahd rights to rehef permits or leases under sections 18 or 19, is entirely within the 
discretion of the Secretar}^ of the Interior. 
Reservation of mineral — When required. 

Where a homestead entry (not under the grazing act) is made without a reser- 
vation of the oil to the Government and the land is withdrawn or classified as oil 
land before completed final proof is submitted, the entryman must take patent with 
a reservation of the oil, unless he can procure a reclassification of the land by the 
department or a removal of the withdrawal, or unless he can show at a hearing (the 
burden of proof being on him) that the land was not of a known mineral character 
at date of final proof. 

But where, in the case last stated, the withdrawal or classification as mineral 
was not made until after fimal proof was submitted, the entryman will be entitled 
to a patent without a reservation, unless the Government can show (the burden of 
proof being on the Government), at a hearing if necessary, that the land was of 
known mineral character at the date of final proof. If the Government can show 
this, the result will be the same regardless of whether there has been a withdrawal 
or classification. 
Interests under drilling contracts. 

A drilhng contract carrying with it a right in the proceeds, or in the land itself, 
will be considered an interest in the lease, and when it comes time to grant a lease 
such drilling contractor will have to show himself qualified to take a lease. In all 



248 APPENDIX 

cases where the drilHng is performed under contract the nature and terms of the 
contract must be disclosed before lease is granted. 

As to permits, the situation is different. If a contractor desires to be recognized 
by the department in connection with a permit, it will be necessary for him to file 
his contract for approval; but if he so desires he may explore the land under con- 
tract with the permittee and bring his contract to the attention of the department 
only when and if he wishes to be recognized as being interested in such lease as may 
be applied for. 
Discovery on adjoining claims. 

In case of two claims that adjoin, it is necessary to have discovery on each claim 
to secure lease for both under section 18. If the discovery is only on one claim, the 
lease must be confined to the limits of the claim containing the discovery. 
Right of assignees to a lease under section i8. 

Good faith locators or their grantees, whose right to a lease is governed by the 
provisions of section 18 of the act, may transfer their interests to contractors, as- 
signees, or lessees who were in undisputed possession prior to July 1, 1919; and such 
owners may then jointly apply for a lease for their aggregate holdings or they may 
make a division of the area and each seek a separate lease for his individual holdings. 
Discovery applicable to all parts of location. 

A discovery on any part of a placer claim used as a basis for relief under section 
18, 19, or 22 of the act will be deemed applicable to every part thereof for leasing 
purposes. 
Only citizens may obtain permits or leases. 

The oil and gas leasing bill provides for the issuance of prospecting permits and 
leases to citizens of the United States, associations of such citizens, corporations 
organized under the laws of the United States or of any State or Territory thereof, 
or municipalities. It follows from this that no one but a citizen can obtain a lease 
or permit, but aliens may be stockholders in some cases. 
Citizenship of agent immaterial. 

A notice of a prospecting permit may be posted by an agent or attorney in fact 
in the name of his principal. The citizenship of such agent is immaterial. 
Oil claims antedating leasing act. 

Oil placer claims for unwithdrawn and unclassified lands upon which discovery 
was made prior to the enactment of the mineral leasing law are not, in the absence 
of fraud, affected thereby so long as the claimant complies with the law. If discovery 
was not made, the claimant in order to protect his right to a patent, must have been 
engaged in diligent work leading to a discovery at the date of the act and must be 
able to show that he has continued such work to discovery. 
Preference right of State grantee. 

To entitle the grantee of a State to a preference right under section 20 of the 
mineral leasing law, the selection must have been approved and transferred by the 
State prior to January 1, 1918. 
When the mineral leasing act took effect. 

Under the general rule of law applicable to such cases, the act of February 25, 
1920, was in force and operation during that entire day, subject, however, to the 
privilege of any person having a substantial right which would be affected by the 
application of the general rule to prove, if he can, the exact time of approval. 

The act of February 25, 1920, supra, section 13, authorizes the Secretary of the 



APPENDIX 249 

Interior, under such rules as he may prescribe, to grant to qualified persons a pros- 
pecting permit "upon not to exceed 2560 acres of land," and allows would-be ap- 
plicants to initiate a preference right, good for 30 days, by posting notice upon the 
ground. This statute and the rules and regulations promulgated thereunder do 
not, however, confer upon such locators a right to obtain a prospecting permit for 
the entire acreage described in any notice of location. The statute simply fixes 
the maximum amount which may be embraced in a single permit, 2560 acres. 

Paragraph 2 of the regulations approved March 11, 1920, states that the grant- 
ing of such a permit " is discretionary with the Secretary of the Interior, and any 
apphcation may be granted or denied, either in part or its entirety, as the facts may 
be deemed to warrant." 

Subject to the foregoing, the following rule is announced for the guidance of the 
officers of the Interior Department and of parties in interest in the disposition of 
conflicts and controversies arising out of locations and apphcations made or filed 
during the day of February 25, 1920: 

All locations made or apphcations filed, pursuant to section 13 of the act of 
February 25, 1920, at any time during the day of February 25, 1920, will be held, 
treated, and regarded as simultaneous, and in case of conflict of location and appli- 
cation, in whole or in part, between two or more qualified applicants, all such ap- 
phcants will be allowed 30 days from notice within which to compromise their differ- 
ences by division of lands or otherwise, in default of which this department will 
make such division or disposition as the facts may warrant. 
Limitations under section 27. 

It will be noted that section 27 seems to apply to two classes of interests, namely, 
those held directly from the Government and those held indirectly through owner- 
ship of stock in corporations. As to leases held directly, there does not seem to be 
much doubt that the same person or corporation may not at the same time have more 
than three leases in any one State, or more than one lease within the geologic struc- 
ture of the same producing oil or gas field. 

The section further provides that '' no corporation shall hold any interest as a 
stockholder of another corporation in more than such number of leases." This 
language, taken in conjunction with the language preceding it, seems to hold that a 
corporation may not have an interest in more than three leases, either directly as a 
lessee, or indirectly as a stockholder in a corporate lessee. True, the next clause 
provides that " no person or corporation shall take or hold any interest or interests 
as a member of an association or associations, or as a stockholder of a corporation 
or corporations," in which the aggregate leasehold interests exceed an amount 
equivalent to the maximum number of acres allowed to one lessee. It is clear that 
as to a corporation the clause last quoted is inconsistent with the clause first quoted, 
and as the clause first quoted is more restrictive as to a corporation than the follow- 
ing clause, it is considered that the former controls. But this leaves an individual 
with the right to hold three leases directly, and, at the same time, to have a stock 
interest in corporations having leases, provided his direct and indirect holdings 
do not exceed the maximum for one person, namely, not exceeding 2560 acres in 
the same structure or 7680 in the same State. It follows also that a person may 
hold stock in any number of corporations holding leases provided his stock interests 
do not represent a greater acreage than that above stated. 

While under the regulations substantially the same restrictions apply to permits 



250 APPENDIX 

as apply to leases, the number of leases one has will not necessarily hmit the num- 
ber of permits he may have, but when a permit ripens into a lease, then the re- 
strictions as to leases apply to both. 
Bond with preference right application. 

In the case of a preference right application under section 19, the bond may be 
filed therewith, or deferred until permit is authorized. 
Articles of incorporation. 

Under section 25 of the regulations, a certified copy of the articles of incorpora- 
tion should be filed with the original apphcation, but an uncertified copy is sufficient 
to accompany the duplicate. 
Rights of association in geologic structure. 

An association may hold only one permit in the same geologic structure, and 
the interest of a member of different associations may aggregate 2560 acres in the 
same structure. 
Ceded Ute Indian lands subject to leasing act. 

By departmental decision of August 8, 1920, it was held that the oil and gas 
deposits contained in that portion of the Ute Indian Reservation in the State of 
Colorado formerly occupied by the Uncompahgre and White River Utes, ceded to 
the United States by the confederated bands of Ute Indians by the treaty of March 
2, 1868, as amended, accepted, and ratified by the act of June 15, 1880 (21 Stat., 
199), and opened to disposal under the provisions of the act of July 28, 1882 (22 
Stat., 178), are subject to disposal under the mineral leasing act. 
Uintah ceded Indian lands subject to leasing act. 

The Uintah Indian lands opened to sale and entry by act of May 27, 1902 (32 
Stat., 263), are subject to the operation of the leasing act of February 25, 1920. 
Procedure in relation to agricultural claims in conflict with permits or leases, or 
subject to preferential rights. 

Department of the Interior, 
General Land Office, 

Washington, October 6, 1920. 
Registers and Receivers, 

United States Land Offices. 

Gentlemen: Instructions have been requested from several local offices as 
to the proper procedure to ta,ke in connection with nonmineral applications or 
selections filed for lands embraced in apphcations for prospecting permits or leases, 
or which may be subject to preference rights, under the leasing act of February 25, 
1920. 

A prospecting permit is granted in contemplation of a future lease for a part 
or all of the same land in case of discovery; hence as to subsequent nonmineral 
entries, with a reservation of the oil or gas to the United States, the lands embraced 
in a prospecting permit should be treated the same as if embraced in an oil or gas 
lease, with a reservation to the United States of the right " to lease, sell, or other- 
wise dispose of the surface of the lands embraced within such lease under existing 
law or laws hereafter enacted, in so far as said surface is not necessary for the use 
of the lessee in extracting or removing the deposits therein, "pursuant to section 29 
of the leasing act. As the placing of such a reservation in a lease is made discre- 
tionary with the Secretary, it necessarily follows that any disposition of the surface 



APPENDIX 251 

of lands embraced in permits or leases is by the act left entirely discretionary with 
the Land Department, to be determined on the facts of each particular case. 

The so-called rehef sections of the act (18, 18 (a), 19, and 22) recognize equit- 
able rights in the owners and occupants of claims initiated under the general mining 
laws and accord to them a preference right which may be exercised by applying 
within the time and in the manner prescribed by said sections for oil or gas leases 
or permits. These prior rights or claims, if asserted within the time accorded the 
claimants by the statute, are superior, both in time and right, to nonmineral ap- 
pUcations or selections having their inception subsequent to the leasing act. It is 
apparent also that the allowance of nonmineral appropriation of the surface of vacant 
lands in producing structures mil interfere with the leasing of such lands by com- 
petitive bidding under section 17 of the leasing act. 

You are therefore directed: 

LANDS OUTSIDE PRODUCING STRUCTURES 

(1) In all cases of appUcations to make nonmineral entries or selections of lands 
outside of areas which have been designated by the department as within the geo- 
logic structures of producing oil or gas fields, and which lands are also embraced in 
appUcations for prospecting permits or in permits granted, such nonmineral ap- 
phcations should be received, noted on your records, suspended, and transmitted 
to the Commissioner of the General Land Office for instructions. If in any case 
such nonmineral entry or selection shall be allowed by you on instructions from the 
Commissioner, the same will be with a reservation of the oil or gas to the United 
States, and subject to the rights of the permittee or lessee, as the case may be, to 
use so much of the surface of such land as is necessary in extracting and removing 
the mineral deposits, without compensation to the nonmineral entryman for such 
use, in accordance with section 29 of the leasing act. 

LANDS IN PRODUCING STRUCTURES 

(2) You will reject all applications to enter, file upon, or select under the non- 
mineral land laws, lands which have been or shall be designated by the department 
as being within the known geologic structures of producing oil or gas fields, pending 
consideration by the department of the agricultural character and value of such 
lands and a determination as to whether the surface of the land is of agricultural 
character and value and may be disposed of without detriment to the pubHc interest. 

(3) All homestead entries or other nonmineral filings or selections allowed prior 
to receipt of these instructions and subsequent to February 24, 1920, which are 
found to be in conflict with preference rights timely asserted under the remedial 
provisions of the act of February 25, 1920, shall be suspended pending the con- 
sideration of the application for the permit or lease, and the parties in interest so 
advised. If the permit or lease be allowed or granted, such homestead entry or 
other allowed nonmineral appHcation or selection will be canceled if the lands are 
within designated geologic structures of producing oil or gas fields. If outside of 
such designations, the agricultural entries, applications, or selections will be allowed 
to stand or will be canceled in the discretion of the department, as provided in sec- 
tion 1 hereof. 



252 APPENDIX 

LIABILITY FOR DAMAGES 

(4) Your attention is drawn to the distinction which exists under the law with 
respect to the rights of permittees and lessees of mineral deposits in cases where the 
nonmineral entry or selection is allowed subsequent to the application for permit 
or lease or subsequent to February 25, 1920, in conflict with rights recognized by 
sections 18, 18 (a), 19, and 22 of the leasing act, and those cases where the non- 
mineral entry, fihng, or selection with a reservation of the mineral (either at time 
of entry or later) under the acts of July 17, 1914 (36 Stat., 509), or December 29, 
1916 (39 Stat., 862), precedes the permit, lease, or mineral right, for in the latter 
case the nonmineral claimant is entitled to be reimbursed for all damages to crops 
and improvements by reason of the operations of the permittee or lessee, as pro- 
vided in those acts, while in the former the respective rights of the mineral and sur- 
face claimants are governed by section 29 of the leasing act. 

Clay Tallman, 

Commissioner, 
Approved October 6, 1920. 
John Barton Payne, 

Secretary, 

EXTRACTS FROM OFFICIAL CORRESPONDENCE OF THE 
DEPARTMENT OF THE INTERIOR 

Land Designated as Oil Structure after Application for Permit. — The regulations 
concerning oil and gas permits and leases based upon rulings of the Secretary of the 
Interior, and approved October 29, 1920, originally stated, — "Where, after appli- 
cation under Section 13 for a permit, and before permit is granted, the land is desig- 
nated as within the structure of a producing oil or gas field, permit cannot be 
allowed." 

This regulation and the ruHngs on which it is based were not issued under a 
mandatory provision of the statute. Section 13 of the act of February 25, 1920, 
authorizing the Secretary of the Interior to grant to any qualified apphcant a pros- 
pecting permit upon lands " wherein such deposits belong to the United States and 
are not within any known geological structure «of a producing oil or gas field." 

Rulings of this Department in cases involving a like situation, arising under 
other land laws, are to the contrary. In the case of Charles C. Conrad (39 L. D., 
432), where a homestead appHcation was filed, and where the entry man had per- 
formed all acts necessary to complete his application, but, by reason of delay in 
action thereupon by the local office, a first form withdrawal under the reclamation 
act intervened, the Department held that his rights could not be prejudiced by the 
inability of the local office to allow the application until after the withdrawal, but 
that they related back to the time when he filed in the local land office his appHcation, 
accompanied by the required showing, including the fees, the land being then sub- 
ject to his appHcation. 

This and similar ruHngs of the Department are approved in principle by the 
recent decisions of the Supreme Court of the United States in cases of Payne vs. 
Central Pacific Railway Company (February 28, 1921); Payne vs. New Mexico 
(March 7, 1921), and Wyoming vs. United States (March 28, 1921). 

Applying the principle so announced, it is clear that, not only equitably but 



APPENDIX 253 

legally, qualified persons who filed proper applications for oil or gas prospecting 
permits under the act of February 25, 1920, cannot and should not be deprived of 
their rights if, because of delay in action upon the applications so filed, there inter- 
venes a designation by this Department of the lands as being within the geological 
structure of a producing oil or gas field, occasioned by a discovery of oil or gas sub- 
sequent to the filing of the application in the local land office. Accordingly, said 
regulation is hereby revoked, and in future apphcations will be adjudicated in 
accordance with the views herein expressed. 

The statute, however, specifically forbids the allowance and approval of a pros- 
pecting permit upon lands within a " known geological structure of a producing oil 
or gas field " (Section 13); and in Section 17 provision is made for the disposition 
of unappropriated lands in such structures by competitive bidding. Therefore, 
nothing in this opinion shall be construed as modif}- ing or affecting previous decisions 
of this Department to the effect that prospecting permits cannot be allowed within 
the geological structure of a producing oil or gas field, so known and existing at and 
prior to the filing of the application for the prospecting permit. 

Limitation of Permits Under Section 19. — Section 19 of the act of February 25, 
1920 (41 Stat., 437), gives to certain persons who had located or acquired placer 
mining claims and who are able to meet other requirements imposed in the law, a 
preference right to prospecting permits upon such locations " upon the same terms 
and conditions, and limitations as to acreage, as other permits provided for in this 
act." 

The hmitation as to acreage which may be included in a single permit is found 
in Section 13 — 2560 acres. There is no limitation in Section 19 as to the number of 
permits which may be obtained by a qualified person or persons who held the placer 
mining claims and are able to meet the conditions of the act. 

As an administrative matter and in harmony with the evident intent of the act 
to avoid monopoly, a regulation was embodied in the oil and gas regulations of 
October 29, 1920, to the effect that quahfied assignees since October 1, 1919, may 
secure preference-right permits, " but no such transferee will be permitted to hold 
permits exceeding 2560 acres for such lands in the same geological structure, nor 
more than three times that area in the same State." 

While the intent of the act is to prevent monopoly, its primary purpose was to 
encourage prospecting for and development of the oil and gas resources of the United 
States. In localities remote from transportation, refineries, pipe lines, and sources 
of supply, it may be difficult to secure the exploration of a wildcat territory if the 
person or corporation conducting the exploration and development is Hmited to a 
maximum of 2560 acres. Moreover, as stated above, Section 19 is a remedial sec- 
tion, designed to take care of equitable claims of those who had initiated claim 
under the placer mining laws prior to withdrawals or prior to the repeal of the gen- 
eral mining laws as apphcable to oil and gas deposits, and consequently no hmitation 
was made in the statute as to the number of such locations which might be surrend- 
ered and made the basis of prospecting permits. The limitation above quoted is 
one of regulation and expediency and not of statute. Therefore, having in mind the 
purpose of the act and the scope of Section 19, it is held that for development pur- 
poses, assignments of prospecting permits secured under Sectipn 19 of the act, to a 
quahfied individual, corporation, or association outside producing oil and gas fields 
and in locaHties without transportation facihties, refineries, pipe fines, or nearby 



254 APPENDIX 

sources of supply, for not exceeding five such permits in a State and near enough to 
each other for common development, whether contiguous or noncontiguous, may be 
presented for the consideration of the Secretary of the Interior, and his approval if 
he shall find same to be in the public interest. 

To the extent of its conflict with the foregoing, said regulation under Section 19 
of the act of February 25, 1920, is modified. 

Bond with Application for Permit. — Paragraph 4 (h) of Circular No. 672, is hereby 
amended to read as follows: 

" The application must be accompanied by a bond with quahfied corporate 
surety, in the sum of $1000, conditioned against the failure of the permittee to 
repair promptly, so far as possible, any damage to the oil strata or deposits 
resulting from improper methods of operation. The penalty of the bond may 
be increased by the Secretary of the Interior when conditions warrant, particu- 
larly in rehef cases." 

Application for Lease. — The regulations pertaining to and governing oil and gas 
permits and leases, pursuant to the Act of Congress of February 25, 1920 (41 Stats., 
437), published as Circular No. 672, are hereby amended so as to incorporate therein 
a new paragraph, to be numbered Paragraph 8 (a), reading as follows: 

8 (a). When an application for a lease of the one-fourth part of the area 
affected by a prospecting permit is submitted, supported by the requisite 
evidence of discovery and production of oil or gas, such application must be 
accompanied by further appHcation by the permittee, or by an assignee of such 
permittee, for a lease of the remaining portion of the area described in the 
permit; or, in the alternative, a relinquishment of the permit and waiver. of 
preference right in respect of such remaining area must be submitted. 



STATE ACKNOWLEDGMENTS 1 

STATE OF ALABAMA, 

County of 

I, , a Notary Public in and for said 

County, in state aforesaid, hereby certify that 

whose name signed to the foregoing conveyance, and who 

knowTQ to me, acknowledged before me on this day, that, being informed on the 

contents of the conveyance, executed the same voluntarily on the 

day the same bears date. 

Given under my hand, this the day of , A. D., 192 



Notary PubUc County 

STATE OF ARKANSAS, 

Be it remembered, that on this day came before me, the undersigned, , 

a notary pubhc within and for the county aforesaid, duly commissioned and acting, 

, to me well known as the grantor (or lessor, etc.) in the foregoing lease, 

and stated that he had executed the same for the consideration and purposes therein 
mentioned and set forth. 

Witness my hand and seal, as such notary pubhc, on this, day of 

, 192 



STATE OF CALIFORNIA, 

On this day of , in the year 

, before me , personally appeared A. B. 

known to me to be the person whose name is subscribed to the within instrument, 
and acknowledged to me that he (or they) executed the same. 



STATE OF ILLINOIS, 

I, , do hereby certify 

that (and his wife), personally kno'^Ti to me 

to be the same person whose name is subscribed to the foregoing instrument, appeared 
before me this day in person, and acknowledged that he (they) signed, sealed and 
dehvered the said instrument as his (their) free and voluntary act, for the uses and 
purposes therein set forth. 

Given under my hand and official seal, this day 

of , A. D., 192 



* For reference, see Giauque, F., Notary's and Conveyancer's Manual. 

255 



256 APPENDIX 

STATE OF INDIANA, 

Be it remembered, that on this day of. . 

, A. D. 192 , before me in and for said 

county, personally appeared , the grantor , in 

the foregoing deed, and acknowledged the execution of the same. 

In witness whereof, I have hereunto set my hand and affixed my official seal, 
the day and year aforesaid. 



STATE OF KANSAS, \ ^ 
County of J 

BE IT REMEMBERED, That on this day of 

in the year of our Lord one thousand nine hundred and 

, before me, a Notary PubHc in and for said County and State, 

came and , 

to me personally known to be the identical person who executed the 

above and foregoing instrument, and who each duly acknowledged the execution of 
the same. 

In Witness Whereof, I have hereunto set my official signature and affixed my 
notarial seal the day and year first above written. 



Notary PubUc 
My Commission expires 



)ss. 



STATE OF KENTUCKY, 
County of 

I, , a 

do certify that the within and foregoing instrument of writing was this day produced 

to me in my County by and, 

his wife, and acknowledged by to be act and deed. 

Given under my hand this day of , 192 



STATE OF LOUISIANA, 
Parish of 

BEFORE ME, a Notary Pubhc in and 

for Parish, Louisiana, on this day 

of 192 , personally came and appeared 

, who in the presence of me, said 

authority, and and 

competent witnesses, declares and acknowledges that 

he the identical person who executed the foregoing 

instrument in writing, that signature thereto own 

true and genuine signature , and that he executed 

said instrument of own free will , and for the purposes and 

considerations therein expressed. 

Thus done and passed on the day and date hereinabove written, in the presence 
of the before-named and undersigned competent witnesses, who have hereunto sub- 



APPENDIX 257 

scribed their names, together with said appealer , and me, said Notary, after 

reading the whole. 



WITNESSES: 



Notary Public 
STATE OF MICHIGAN, 

On this day of , A. D., 192 , before 

me, , personally came and , known 

to me to be the person (s) who executed the foregoing instrument, and acknowledged 
as free act and deed. 



STATE OF MONTANA, 

On this day of , 192 , 

before me , in and for said county personally 

appeared and , personally known to me to be the 

person .... described in, and who executed the foregoing instrument, and acknowl- 
edged that executed the same. 

In witness whereof, I have hereunto subscribed my name and affixed my official 
seal the day and year in this certificate first above written. 



STATE OF OHIO, 

On this day of , A. D., 19 , before 

me, a in and for said county, personally came 

and , the grantor .... in the foregoing lease, and acknowl- 
edged the signing thereof to be voluntary act. 

Witness my official signature and seal, on the day last above mentioned. 



STATE OF OKLAHOMA, \ 

; SS 

County of / 

BE IT REMEMBERED, That on this day of 

, in the year of our Lord, one thousand nine hundred and 

, before me, a Notary PubHc in and for said County and State, 

personally appeared and 

to me known to be the identical person .... who executed the within and foregoing 

instrument and acknowledged to me that executed the same as . . 

free and voluntary act and deed for the uses and purposes therein set 

forth. 

IN WITNESS WHEREOF, I have hereunto set my official signature and 
affixed my notarial seal the day and year first above written. 



Notary Public 
My Commission expires 



258 APPENDIX 



STATE OF PENNSYLVANIA, County of. 



On this day of 192 before 

me, a in and for said County, personally appeared the above 

named 

and acknowledged the within instrument to be act and deed, and 

desired the same to be recorded as such. 

WITNESS my hand and seal the date of aforesaid. 

(Seal) 

THE STATE OF TEXAS, 

County of BEFORE ME, 



in and 

for County, Texas, on this day personally appeared 

known to me to be the person whose name subscribed to the 

foregoing instrument, and acknowledged to me that he 

executed the same for the purposes and consideration therein expressed. 

GIVEN Under My Hand and Seal of Office, this day of 

A.D., 19 

(L.S.) 

My Commission expires , 



Notary PubUc, County, Texas . 



STATE OF WYOMING, 

I, , in and for said 

county, hereby certify that and , personally known 

to me to be the person — whose names are subscribed to the foregoing instrument, 

appeared in person before me this day, and acknowledged that signed, 

sealed and deUvered the said instrument as free and voluntary act, for 

the uses and purposes therein set forth. 

Given under my hand, this day of , 

A. D., 19 



UNIFORM ACKNOWLEDGMENT 

At the first meeting of the National Conference of Commissioners 
on Uniform State Laws, held at Saratoga, New York, August 24-27, 
1892, the following Uniform Act Relative to Acknowledgment of 
Written Instruments was adopted, approved, and recommended to 
the various legislatures for enactment into law. 

Section 1. — Either the form of acknowledgment now in use in this State, or the 
following: 



APPENDIX 259 

On this day of , 19 , before 

me personally appeared A. B. (or A. B. and C. D.), to me known to be the person 
(or persons) described in and who executed the foregoing instrument, and acknowl- 
edged that he (or they) executed the same as his (or their) free act and deed.^ 

1 C. T. Terry, Uniform State Laws Annotated, 1920. 



INDEX 



Accounting expenses, 129 

Acknowledgment, uniform, 258 

Acknowledgments, state forms of, 255 

Agents, 30 

Age size method, 146 

Alaska, 39, 207, 231 

Alberta, laws of, 48 

Annual report, outline of, 93 

Appraisal, 4, 144 

Argentina, laws of, 52 

Arizona, 43 

Assignment, 17, 28 

Balance sheet, 97 
Ball, Max, 38 
Barrel, cost, 103, 104 
Beal, Carl H., 144 
Bolivia, laws of, 52 
Bond of lessee, 227 

for permittee, 214 
Bonds, 71, 73 
Bonus, 22, 31, 57 
Bowman, Isaiah, 153 
Brazil, laws of, 52 
British Columbia, laws of, 47, 48 
British Guiana, 52 

Honduras, 51 

West Indies, 51 
Burbank, Oklahoma, 117 
Burkbumett pool, 8 

Cable tool system, 154 
Calgary, 9 
California costs, 108 
Canada, lands of, 46 
Canadian method of drilling, 163 
Capital sum, 137 
Carlyle Pool, Illinois, 3 
Casing, cost in Oklahoma, 114 
methods, 161 



Checkerboarding, 3 

Chile, laws of, 52 

Choice of structure, 9 

Circulating system of drilling, 160 

Classification of producing companies, 1 

Close-in acreage, 5 

Coal, 207 

Coal rank, 11 

Colorado, laws of, 42 

Columbia, laws of, 53 

Combination system of drilling, 159 

Commencement of drilHng, 25 

Common stock, 73 

Conservative operations, 3 

Cooperation, 4 

Cost accounting, advantages of, 124 

statements, 129 

system, 126 
Costa Rica, laws of, 51 
Costs, 132 

examples of, 107 

methods of compiling, 126 

of drilhng, 113 

of supplies in California, 115 
Cuba, laws of, 51 
Cushing pool, 33 

Day, David T., 153 

Denver pool, Oklahoma, 88, 118 

Decline curve, age-size method, 147 

of wells, 89 
Deep tests, 12 
Department executives, 77 
Depletion, 107, 132, 136 

deduction, 137 

rate of, 149 

record form, 138 

reserve, 2 
Depreciation, 103, 132, 133 

rate of, 149 



261 



262 



INDEX 



Depreciation, straight line, 135 
Depths of weUs drilled, 200 
Description in lease, 23 
Developed oil property, 3 
Diligence of operation, 26 
Discovery well, 150 
DrilUng, 153 

comparison of systems, 157 

contract, 167 

costs of, 113, 158 

fuel supply, 166 

hmit of depth, 164 

power supply, 166 

time, 158 
Dry hole contributions, 13, 61 

percentage, 200 
Dry holes, significance of, 12 



Graphic comparison of fields, 13 
Guatemala, laws of, 51 

Haynesville, Louisiana, 121 
Healton pool, 67, 69 
Honduras, laws of, 51 

Illinois, 43 

Income from lease, 32 

statement, 95 

tax, 133, 136, 142, 152 
Incorporation, 71 
Indian lands, 43 

leases on, 44 
Integration of oil companies, 64, 68 

Jeffrey, W. H., 153 



Ecuador, laws of, 54 
Edge lease, 87 

Effect of depth on structures, 11 
Efficiency of oil companies, 65 
Eldorado pool, Arkansas, 199 
Executive, choice of, 75 
Expense of organization, 84 
Expert services, 84 

" Family curve " of Lewis & Beal, 

145 
Fee purchase, 15 
Financing of oU companies, 71 
Folds from differential settling, 11 
Foreign exploration, 6 
Fox Bush pool, Kansas, 118 
Future price of petroleum, 189 

Gain from sale, 151 

Gas gasoline extraction, 170 

absorption process, 173 

absorption with charcoal, 174 

absorption with naptha, 174 

choice of process, 175 

compression method, 170 

marketing, 175 

royalty, 175 
Gas rental, 24, 33 
Gasoline appraisal, 151 
Going concern value, 83 



Kansas, 43 

Kern county, California, 121 

Labor cost, 123 

Land, purchase in fee, 15 

Lease, 16, 18 

acknowledgment of, 27 

broker, 59 

drilling requirements of, 25 

duration of, 22 

filing and recording of, 27 

form of, 20, 223 

on public lands, 39, 221 

provisions of, 19 

signature of, 19, 27 

surrender clause, 26 
Leasers, 29 
Leases, trade in, 57 
Leasing, 29 
Lewis, J. O., 144 
Lifting or leasehold expense, 102 
Log, 163 
Louisiana, 2, 3, 16, 22 

laws of, 40 
Lucas, A, F., 153 

Manitoba, laws of, 48 
McKeesport, Pennsylvania, 25, 89 
McLaughlin, R. P., 153 
Mexia pool, Texas, 121, 199 



INDEX 



263 



Mexico, 7, 15, 69, 122, 177 

laws of, 50 

migration and accumulation, 184 

oil producing horizons, 183 

pools of, 178 

production of, 177 

prospective fields, 182, 184 

reserves of, 182 
Michigan, 43 

Mineral rights, purchase of, 16 
Montana, laws of, 41 
Morrison & DeSoto, 18 

Nebraska, laws of, 41 
New Brunswick, laws of, 46 
New company operations, 5 
New Mexico, laws of, 42 
Nominal consideration, 22 
North Dakota, 43 
Northwest Territories, laws of, 48 
Notes, 73 

Offset leases, 61 

Ohio, laws of, 40 

Oil and gas, fundamental characteristics, 

18 
Oil and gas rights, 15 

lease of, 16 

purchase of, 16 
Oil Land Leasing Act, 17, 38, 202 

outline of, 40 

regulations, 212, 239 
Oil shale, 207 

storage, 5 
Oklahoma, laws of, 40 
Okmulgee county, Oklahoma, 117 
Ontario, laws of, 47 
Organization charts, 78, 79, 80, 81 
Osage, 23 

costs, 108 

Reservation, laws of, 44 
Outlook in oil industry, 198 
Overhead expense, 103 

Paine & Stroud, 153 
Panama, laws of, 51 
Paraguay, laws of, 55 
Peace River district, laws of, 48 



Pennsylvania crude, price of, 195 
Permit, 39, 212 

application for, 213 

form of, 217 
Personnel, 94 
Peru, 55 
Petroleum, future price of, 189 

factors influencing future price of, 190 

normal price and war inflation, 194 
Phosphate, 207 
Physical property, 135 
Pipe line, 68, 237 
Placer Law applied to oil and gas, 35, 37 

assessment work. under, 36 

discovery under, 36 

location under, 36 

origin and apphcation of, 35 

patent under, 37 

provisions of, 35 

size of claim under, 36 
Placer lease on pubhc lands, 40 
Portable driUing machines, 160 
Preference lease on pubhc lands, 39 

right to permit, 216 
Preferred stock, 73 
Price of petroleum, 67, 189 
Producers, 88 

lease, 19, 27 
Production methods for older companies, 2 

statement, 100 
Profit and loss statement, 95 
Prospectus, 87 
Protection acreage, 3 

to landowners, 26 

Quebec, laws of, 47 

Red Beds of Oklahoma, 13 

Refineries, 4 

Relief measures, 228 

Rental, 26, 31 

Rice & Lyons, 18 

Riveted casing, 162 

Rotary drilling, 155 

Royalty, 17, 23, 33, 58, 60, 107 

in Oil Land Leasing Act, 24 

on gas, 24 

trade in, 57 



264 



INDEX 



Salaries, 83 
Salvador, laws of, 52 
Sands, 10 

Saskatchewan, laws of, 48 
Scope of oil companies, 63 
Shamel, C. H, 18 
Size of oil companies, 63 
Sliding royalty, 23, 24 
Sodium, 207 

South American money values, 260 
South Dakota, laws of, 41 
Spacing of wells, 87 
Speculation in leases and royalties, 59 
Standard system of drilling, 154 
State laws, 40 

Stephens county, Texas, 119 
Stock, 71, 89 

Stock company methods of getting pro- 
duction, 8 
Stock issue, 72 

purchase, 60 

selKng, 8 
Stratigraphic section, 10 
Structure, 9, 11 
Subsidiary companies, 6 
Suman, J. R., 153 
Surplus account, 97 
Surrender right, 26 
Syndicate operations, 66 

Tampico fields, 7 
Tax appraisal, 85 

returns, preparation of, 143 
Taxes, federal, 142 

state, 142 
Test well, 33 



Texas, 2 

acknowledgment, 27 

Gulf Coast, 120 

laws of, 42 
Thompson, A. B., 153 

J. W., 18, 46 
Thornton, W. W., 18 
Towanda, 89 
Treasury stock, 74 
Trinidad, 51 
Tubing cost in Oklahoma, 114 

Unconformities, 13 

Undeveloped leases, 89 

United States Bureau of Mines. 18. 126 

Uruguay, 55 

Utah, laws of, 42 

Valuation schedules, 144 
Veasey, J. A., 18 
Venezuela, laws of, 55 
Voucher register, 127 

Washington, laws of, 42 
Well-day cost, 103, 104 
Well-share purchases, 62 
Westcott, H. P., 153 
Wholesale price indices, 192 
Wichita county, Texas, 119 
Wilcox sand, 12 
Wildcat operations, 2 
Withdrawal of public lands, 38 
Wyoming, laws of, 41 

Young county, Texas, 119 
Yukon Territory, laws of, 48 



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